PLEASE FOOD & BEVERAGE PROFESSIONALS / EXPERIENCED RESTAURANT PROFESSIONALS OR ACCOUNTING / FINANCE SPECIALISTS RESPOND ONLY
Please answer questions A & B in both case studies below…
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Case Study 2: Making the Business Decision (Breaking Even)
Tracy Chen began dabbling in pastry making several years ago as a hobby. Her pastry is quite creative, and it has been so popular with friends and others that she has decided to quit her job with a travel agency and prepare pasty full-time. She will be giving up her salary from the travel agency, a steady $2,000 per month.
Ms. Chen has found a small building near her former employer to rent for her pastry shop at $400 per month. She estimates that for all her specially selected pastries, the ingredient cost will be $0.50 per finished piece. She plans to hire workers to produce the pastries at a labor rate of $7.50 per hour, and it will take 8 hours to produce 12 dozen sets of ten assorted pastries. The retail selling price for each pastry is $2.50. To sell her pastries, Ms. Chen is of the opinion that she must advertise heavily in the local area. An advertising agency states that it will handle advertising for a fee of $200 per month. Her brother will sell the pastries at the counter and to local businesses for a commission of $5 per dozen pastries.
Ms. Chen already owns the production equipment, which she purchased several years ago. This equipment will depreciate at a rate of $50 per month. A phone installed in the shop for taking orders will cost $20 per month. In addition, a recording device will be attached to the phone for taking after-hours messages. The phone company will charge Ms. Chen $0.40 for each message recorded.
Ms. Chen has some money in savings that is earning interest of $5,000 per year. These savings will be withdrawn and used to get the business going. For the time being, Ms. Chen does not intend to draw any salary for herself.
a. Do you think Ms. Chen should open the pastry shop, and what advice would you give her?
b. What is her break-even point?
Case Study 4: Evaluating a Company’s Budget Procedures
Colin Patrick and Al Johnson strolled back to their offices from the company head-quarters. Colin is the director of food and beverage; Al is the director of engineering. The men had just attended the monthly performance evaluation meeting for the Shoshone Hotel food and beverage division. These meetings had been held on the third Tuesday of each month since Carlton Drakes Jr., the chairman’s son, had become the managing director a year earlier.
As they were walking, Colin spoke. “Boy, I hate those meetings! I never know whether my department’s accounting reports will show good or bad performance. I’m beginning to expect the worst. If the accountants say I save the company a dollar, I’m called ‘Sir,’ but if I spend even a little too much – boy, do I get in trouble. I don’t know if I can hold on until I retire.”
Colin had just been given the worst evaluation he had ever received in his long career with Shoshone Hotel. He had been the most respected of the experienced food and beverage managers in the company. When Carlton Drake Jr. became the managing director, he directed that monthly performance comparisons be made between actual and budgeted costs for each department. The departmental budgets were intended to encourage the supervisors to reduce inefficiencies and to seek cost reduction opportunities. The company controller was instructed to have his staff “tighten” the budget slightly whenever a department attained its budget in a given month; this was done to reinforce the hotel supervisor’s desire to reduce costs. The managing director often stressed the importance of continued progress toward attaining the budget; he also made it known that he kept a file of these performance reports for future reference when he succeeded his father.
Colin Patrick’s conversation with Al Johnson continued as follows:
Colin: I really don’t understand. We’ve worked hard to get up to budget, and the minute we make it they tighten the budget on us. We can’t work faster and still maintain quality. I think my staff is ready to quit trying. Besides, those report don’t tell the whole story. We always seem to be interrupting the big job for all those small rush orders. All that setup and equipment breakdown time is killing us. And quite frankly, Al, you were no help. When our baking oven broke down last month, your people were nowhere to be found. We had to take it apart ourselves and got stuck with all that idle time.
Al: I’m sorry about that, Colin, but you know my department has had trouble making budget too. We were running well behind at the time of that problem and if we’d spent a day on that old machine, we never would have made it up. Instead we made the scheduled inspections of the elevators because we knew we could do those in less than the budgeted time.
Colin: Well, Al, at least you have some options. I’m locked into what the catering department assigns to me, and you know they’re being harassed by sales for those special orders. Incidentally, why didn’t your report show all the supplies you guys wasted last month when you were working in Kevin’s department?
Al: We’re not out of the woods on that deal yet. We charged the maximum we could to our other work and haven’t even reported some of it yet.
Colin: Well, I’m glad you have a way of getting out of the pressure. The accountants seem to know everything that’s happening in my department, sometimes even before I do. I thought all that budget and accounting stuff was supposed to help, but it just gets me into trouble. It’s all a big pain. I’m trying to put out quality work; they’re trying to save pennies.
a. Identify the problems that exist in the Shoshone Hotel’s budgetary control system, and explain how the problems are likely to reduce the effectiveness of the system.
b. Explain how Shoshone Hotel’s budgetary control system could be revised to improve its effectiveness.