Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 08

CHAPTER 8
RELEVANT REVENUE, COSTS AND
DECISION-MAKING
I.

Questions
1.

Price-cutting Method. Price cutting occurs when prices are reduced below those
of the competition. This can be a risky method if it ignores costs, because if
variable costs are higher than prices, profits will be eroded. Some restaurant
operators set their food menu prices below costs on the risky assumption they
will more than make up the losses by profits on alcoholic beverage sales. To use
this method, the reduction in prices must be more than compensated by selling
additional products. If the extra business gained is simply taken away from
competitors, they will also be forced to reduce their prices and a price war may
result.
Competitive Method. Competitive pricing means matching prices to those of the
competition and then differentiating in such areas as location, atmosphere, and
other nonprice factors. When there is one dominant operator in the market that
generally takes the lead in establishing prices, with its close competitors
matching increases and decreases, this method is then referred to as the followthe-leader method. Competitive pricing tends to ensure there is no price cutting
and resulting reduction in profits. In other words, there is market price stability.
This may be a useful method in the short run. However, if competitive pricing is
used without knowledge of the differences that exist (in such matters as product
and costs) between one establishment and another, then this method can be risky.
Markup Method. The markup method is used, for example, when a restaurant’s
traditional food cost percentage (as it appears on past income statements) is
applied to determine the price of any new menu items offered. For example, if
traditionally the restaurant has been operating at a 40% food cost, any new menu
items offered will be priced so that they also result in a 40% food cost. The

major problem with this method is that it assumes that 40% is the correct food
cost for the restaurant to achieve its desired profit.

2.

Factors considered include the menu price ranges needed to accommodate
clientele catered to; gross margin of different menu items; and pricing of the
competition.

3.

Food cost percentage is important to menu pricing to ensure that the selling
price is high enough to cover the cost of food and provide a profit margin.


8-2

Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

4.

Menu engineering is a sophisticated and fairly complex approach that considers
both the profitability and popularity of competing menu items.

5.

Average room rate is determined by dividing the Rooms Department Revenue
by Rooms expected to be sold. Refer to page 192.

II. Practical Exercises and Problems

A. EXERCISES
EXERCISE 1
Actual room rates vary. Some customers may choose rooms with higher rate
because of the amenities available while some may choose rooms with lower rates.
EXERCISE 2
P28,000
1 – 0.20

=

Operating income

P28,000
0.80

=

=

P35,000

EXERCISE 3
Assume that level of operation is at break-even point and “x” represents total
revenue:
x – 0.84x – P145,000 =
0.16x =
x =

0
P145,000

P906,250

EXERCISE 4
Average check

P46,800
88 x 2.5 x 26

=

=

P46,800
5,720

=

P8.18

EXERCISE 5
=

0.65 x P988,000
108 x 1.75 x 312


Relevant Revenue, Costs and Decision-Making

Average check, dinner
=

P642,200
58,968

=

P10.89

EXERCISE 6
Room double occupancy percentage

=
=

10,512 – 8,760 = 1,752
1,752
8,760

=

20%

EXERCISE 7
Rooms to be sold

=
=
=

Rooms available x Occupancy rate x 365

40 x 70% x 365
10,220
P388,350
10,220

Average room rate =
EXERCISE 8
Singles =
Doubles

40 – 15 = 25
15

25x + 15 (x + 80) =
25x + 15x + 1,200 =
– 1,200
40x
=
40
x
double

B. PROBLEMS
PROBLEM 1
Requirement (1)

P18,800
P18,800
– 1,200
P17,600

40

=

P440 (single)

=
=

P440 + P80
P520

=

P38.00

8-3


8-4

Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

Multiple

=

1 / 0.30 =

Chicken Delight

Pork Squeal
Steak Supreme

3.33

Ingredient Cost
P2.50
P2.75
P3.75

Multiple
3.33
3.33
3.33

New Price
P 8.33
P 9.16
P12.49

Requirement (2)
Refer to the discussion on mark-up approaches to pricing on pages 190 to 192.
PROBLEM 2
Requirement (1)
Sandwich
Pork Barrel
Lamb Leg
Chicken Breast
Burger Delight
Super Burger

Roast Beef
Ocean Catch
Tuna Salad
Egg Salad
Cheese Mix
TOTAL SALES

Selling Price
P3.95
3.75
3.95
3.45
4.95
4.95
4.45
3.50
3.25
2.95

Number Sold
50
40
150
300
190
250
200
175
150
60

Cost
P1.30
1.00
1.40
0.85
1.25
1.50
1.20
0.60
0.35
0.40

Number Sold
50
40
150
300
190
250
200
175
150
60

P 197.50
150.00
592.50
1,035.00
940.50

1,237.50
890.00
612.50
487.50
177.00
P6,320.00

Requirement (2)
Sandwich
Pork Barrel
Lamb Leg
Chicken Breast
Burger Delight
Super Burger
Roast Beef
Ocean Catch
Tuna Salad
Egg Salad
Cheese Mix
TOTAL COST
Requirement (3)
Food cost percentage

=

P1,604
P6,320

=

25.38%

P 65.00
40.00
210.00
255.00
237.50
375.00
240.00
105.00
52.50
24.00
P1,604.00


Relevant Revenue, Costs and Decision-Making

8-5

Requirement (4)
Total Sales
Less: Total Costs
Total Contribution Margin
Divide by: Total number sold
Average Contribution Margin

P6,320.00
1,604.00
P4,716.00
÷ 1,565

P
3.01

PROBLEM 3
Requirement (1)
Alternative 1

Chicken
Fish
Pork chops
Steak

Selling
Price
P 5.95
P 6.95
P 8.95
P11.95

Food
Cost
P1.78
P2.43
P3.58
P5.97

Meals
Sold
400
300

200
100
1,000

Selling
Price
P 5.95
P 6.95
P 8.95
P11.95

Food
Cost
P1.78
P2.43
P3.58
P5.97

Meals
Sold
350
300
200
150
1,000

Selling
Price
P 5.95
P 6.95

P 8.95
P11.95

Food
Cost
P1.78
P2.43
P3.58
P5.97

Meals
Sold
100
150
250
500
1,000

Revenue
P2,380.00
2,085.00
1,790.00
1,195.00
P7,450.00

Total
Cost of
Food
P 712.00
729.00

716.00
597.00
P2,754.00

Gross
Profit
P1,668.00
1,356.00
1,074.00
598.00
P4,696.00

Revenue
P2,082.50
2,085.00
1,790.00
1,792.50
P7,750.00

Total
Cost of
Food
P 623.00
729.00
716.00
895.50
P2,963.50

Gross
Profit

P1,459.50
1,356.00
1,074.00
897.00
P4,786.50

Total
Cost of
Revenue
Food
P 595.00 P 178.00
1,042.50
364.50
2,237.50
895.00
5,975.00
2,985.00
P9,850.00 P4,422.50
Food
Gross
Cost
Profit
Percentage

Gross
Profit
P 417.00
678.00
1,342.50
2,990.00

P5,427.50
Gross
Margin
Per Meal

Alternative 2

Chicken
Fish
Pork chops
Steak

Alternative 3

Chicken
Fish
Pork chops
Steak
Sales
Mix
Alternativ
e

Total
Revenue

Total
Cost of
Food

8-6

Solutions Manual - Managerial Accounting and Finance for Hospitality Operations

1
2
3

P7,450
7,750
9,850

P2,754.00
2,963.50
4,422.50

P4,696.00
4,786.50
5,427.50

36.97%
38.24%
44.90%

P4.70
4.80
5.40

Requirement (2)

Sales Mix # 3 is preferred because it yields the highest gross profit.
PROBLEM 4
Requirement (a)
Return on owner investment:
Net income after tax = P80,000 x 0.15 = P12,000
Calculation of Income before tax:
NI after tax
1 – Tax rate

= Income before tax

NI after tax
1 – Tax rate

=

P12,000
1 – 0.25

=

P12,000
0.75

Sales revenue
Food cost
Wage cost
Other costs
Salaries
Administration

Maintenance
Utilities
License
Insurance
Interest
Depreciation
Desired operating profit before tax
Total

S

=
=

=

?

P32,400
9,800
3,600
Fixed
8,400
Costs
2,500
3,000
2,800
15,100
16,000
P93,600 = 18%

P77,600 + P16,000
18%
P93,600
18%

P16,000

=

P520,000

100%
(36%)
(34%)
(12%)


Relevant Revenue, Costs and Decision-Making

Sales revenue (P93,600 / 0.18)
Food cost, wage cost and other costs (P520,000 x 0.82)
Contributory income

P520,000
(426,400)
P 93,600

Total operating costs including interest
Income (before tax)

Income tax
Net income

(77,600)
P 16,000
(4,000)
P 12,000

Requirement (b)
Average check

=

=

P520,000
60 x 2.5 x 365
P520,000
54,750

=

P9.50

8-7