Question

Daudi owns and manages a restaurant featuring Middle Eastern cuisine. His operating results for this year are listed below. For next year, Daudi expects that his revenue will increase 5 percent. He also expects that the percentage of revenue he spends on food will remain unchanged, but that employee raises and rising health care costs will mean he will spend 10 percent more for the cost of labor next year than he spent this year. Because of new cost control measures he plans to implement, Daudi expects the total amount that he will spend for other expenses next year will be unchanged from this year. Help Daudi prepare a budget for next year that will show the amount of revenue, expenses, and profit his operation will likely experience. Show each amount in dollars and as a percentage of revenue. Should Daudi's profits next year be greater or lesser than this year? By how much? Answer:

Answer 1

Daudi's profits next year will likely be lesser than this year if the increase in labor costs is greater than the increase in revenue from the 5% rise in sales. Without the current labor costs and other expenses, we cannot calculate the exact budget for the next year.

Step-by-step explanation:

To assist Daudi in preparing a budget for next year, we need to calculate the expected revenue, expenses, and profit based on the information provided.

• Current revenue is $20,000.
• Current food cost (variable cost) is $15,000, which is 75% of the current revenue.
• Next year's revenue is expected to increase by 5%, so it will be $21,000 (5% of $20,000 = $1,000 increase).
• The cost of food as a percentage of revenue will remain unchanged, so it will also be 75% of the new revenue, which equals $15,750 ($21,000 * 75%).
• The cost of labor will increase by 10%. If the current labor cost is not given, we need that figure to calculate the new labor cost.
• Other expenses will remain the same.

Without the current labor costs and other expense amounts, we cannot give precise dollar amounts for next year's expenses or profits. However, assuming the increase in labor costs outweighs the 5% increase in revenue, Daudi's profits next year would be lesser than this year by the amount of the increase in labor costs minus the increase in revenue.

If precise figures for current labor and other expenses were provided, we could calculate exact figures for next year's budget.