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# William's Restaurant: classify costs, income statement

Lauren Stephens owns William's Restaurant, which sells hamburgers for carry out or drive through only. Each Hamburger sells for \$2.

Lauren employs several part-time employees and a full-time manager. She leases the building and hires a cleaning company to provide services on a weekly basis. The Manager, who is paid a monthly salary carries out all administrative functions such as hiring, scheduling, and counting cash.

The following expenses were incurred in November.

Ground Meat \$1,500
Lettuce \$350
Tomatoes \$400
Buns \$400
Condiments \$70
Part-Time, Cooks \$2,500
Part-Time, Servers \$2,250
Wrapping paper & bags \$30
Manager's salary \$2,100
Utilities \$600
Depreciation, grills \$350
Depreciation, signs \$100
Rent \$800
Cleaning Service \$300

The restaurant sold 10,000 hamburgers during the month, and there is no WIP inventory at the end of the month.

Questions:

a) Identify each expense as fixed or variable.
b) Classify each cost as one of the following: direct materials cost, direct labor cost, overhead cost, or period expense.
c) Prepare an income statement for November.
d) Compute gross margin as percentage of sales.
e) Compute net income as a percentage of sales. What are the implications of your findings in terms of risk? Explain.

#### Solution Preview

a. Fixed expenses include manager salary, utilities, depreciation on signs, advertising, rent, cleaning service. The rest are variable because each will vary with the amount of sales. Depreciation on grills could be considered either variable or fixed but the fact that the grills will wear out sooner with more sales is an indicator of a variable cost.

b. Direct materials will include meat, lettuce, tomatoes, buns, condiments: all part of the product. Direct labor will include cooks and servers. Overhead costs are the same as fixed expenses above. Wrapping paper ...

#### Solution Summary

The solution provides good explanations for questions together with a properly prepared income statement for November. Two ratios are computed as requested in the problem.

\$2.19