case study 1

Running Head: Profit Management

Case Study 1:

Profit Management
Case Study 1

Introduction

The decline of profit in a business establishment is basically due to an imbalance in the implementation of its finances, where the expenses outweigh the income generated. To put it plainly, it spends more than it earns. But while the main factor could be a decrease in income from sales, or alternatively, an increase in operating costs (or both), the underlying causes still remain obscure.

The Problem and The Solution

To obtain the precise numerical figures involved in the restaurant’s operations, the finance manager or an accounting officer must be consulted. Once these statistics are in hand, calculating the statement of profit and loss may ensue. Through this, it can be determined how the restaurant is presently performing, profit-wise. As expected, the results (see figure 1 below) reveal that the foodservice is operating a long way from its purported gross profit margin (GPM) and break-even point. The GPM is calculated as follows: gross profit / total revenue=gross profit margin (Break-Even Analysis, n.d.). Subtracting the total variable cost of $43,000 from the total sales revenue of $80,000 derives the gross profit, and thus applying to the equation, yields $37,000 / $80,000 = 0.4625 (Break-Even Analysis, n.d.). Hence, the GPM is 46.25%. At the present month, the restaurant has a net operating income of only $11,000. From the GPM that has been calculated, the restaurant’s break-even point would be pegged at $56,216.22. This amount is the quotient of dividing the total fixed cost (TFC) by the GPM, or $26,000 / 0.4625 and it is the amount the company needs to earn in a month just to pay the bills. Therefore, if the goal of a business were to earn profit, then the restaurant would need to surpass its break-even point, or achieve a more than a 500% profit growth from $11,000 to $56,216.

There are a couple of ways to approach this problem, and one is to try to lower the break-even volume (Break-Even Analysis, n.d.) by finding ways to minimize the variable costs. This consequently leads to a higher gross profit, and, using straightforward computation, it can be seen that a higher gross profit ultimately yields a lower break-even point.

Another way would be to increase the selling prices of their products. Customers usually get dismayed with price hikes, but using only a small fraction of increase, say, about 4 or 5 percent, may be unnoticeable (Break-Even Analysis, n.d.). For example, if the total sales revenue is $80,000, a 5% raise on prices will bring about a boost of $4000. Accordingly, the GPM is enhanced to about 48.81%, and the break-even point significantly reduced to $53,268.32 (see figure 2). That means the restaurant needs $2947.90 less to break-even, or more than a 5% growth in profits. In this way, performance is improved without considerably affecting their customers’ patronage, and the badly needed 500% raise in profits does not seem too far-fetched after all.

Conclusion and Recommendations

As in any other business endeavor, the fundamental principle in order to maintain a profitable operation is to “buy low, sell high.” In this case, looking for cheaper alternative sources of ingredients and stocks for their inventory may in part help solve the restaurant’s financial troubles. Then again, selling prices may also be adjusted a bit to add a little extra income, but if the marketing plan entails giving out promotional offers to boost sales, then a price increase would need to be calculated carefully to make sure that it will not result in a profit loss or in an overprice. Finally, it is recommended that the branch calculate and analyze their profit and loss statement every quarter so as to maintain an accurate representation of the current break-even point and preempt any similar recurrence of financial difficulties in the future.

Figure 1
Restaurant Branch Profit and Loss Statement For the month ended Month,day,year
Total sales revenue	$	80,000
Less total variable costs	$	43,000
Gross profit	$	37,000
Less total fixed costs	$	26,000
Net operating income	$	11,000

Please note, that assuming all expenses remained constant, the figures in the chart below were arrived at by imposing a 5% monthly increase in Total Sales Revenue, repeated over a period of two (2) months.

Figure 2

Reference

Break-Even Analysis. (n.d.). Retrieved August 12, 2007, from http://www.businesstown.com/accounting/projections-breakeven.asp