Share
Explore BrainMass

A thorough analysis of cost volume profit

Pancake World (PW) is a franchise food service company with over 2,000 restaurants world-wide. A unit of PW located in Largo, Florida is the focus of this case. Louis Devaroe owns this unit under franchise rights. A brief history of the company will get us started on our understanding of this particular operation.

Company History

As the name suggests, the main focus for PW is the breakfast menu, notably pancakes. The company started in 1950 as a single unit operation in northern California. The insight by investors took this single unit operation to its prominence today. The initial philosophy was "anytime is a good time for breakfast." Now, the philosophy has changed to "come hungry, leave happy." This change in philosophy has come about by the evolution of its menu. Still offering breakfast anytime, lunch and dinner items have been incorporated to help PW compete in the ever-changing, competitive restaurant industry.

Creating value and offering quality products led to success in tough markets. These markets have a high concentration of families and senior citizens. The image as a gathering place adds to the ambience.

Growth at PW in the beginning was slow. This was due to top managements' commitment to replicate the original restaurant, keeping the atmosphere and feeling of a gathering place. Now PW is stronger than ever. This, in part, is due to other corporations that have bought exclusive rights to territories. PW has accountability systems that ensure integrity and high standards are maintained.

Exhibit 1 is a customer profile analysis used by PW to aid in demographic study of the potential market.

Tracking Costs, Payroll, and Inventory

With the aid of software specifically designed for the restaurant industry, tracking costs is not difficult. Also, outside service companies handle the company's payroll and marketing. The benefit of outsourcing these services is that it enables the company to keep its overall costs down to manageable levels, and to focus on strategy and day-to-day operations. It also allows companies such as PW to focus on improving customer service. Payroll and inventory are the two main costs in food service operations. Discussion on these topics and the accounting procedures used to track them follow.

Pancake World has found that outsourcing the payroll function to a payroll service is cost effective. Payroll data is transferred directly to the payroll service via the internet. ADP Corporation handles payroll for small restaurants with fifteen employees to multi-unit franchise service corporations with thousands of employees. ADP provides this service at a cost of $3.00 per employee per paycheck. A cost comparison was done to see if rates charged were any different between this multi-unit franchise and a single unit with 25 employees. The findings concluded no difference in cost per employee.

Inventory

One area of foodservice operation that has advanced significantly in recent years is inventory management. This has been made possible by internet-based software that links the restaurant to the vendor and also to corporate headquarters. This data transfer system has cut out many steps in the ordering process. Multi-unit franchise operations enter into a relationship with a food service vendor. In this particular case, PW buys its product from U.S. Foodservice Inc. Both companies know the value of a good relationship.

For U.S. Foodservice Inc., on-time delivery, undamaged product, and, cost savings of product for the buyer are some of the key success factors. PW has multiple restaurants that commit to one vendor. U.S. Foodservice Inc. can handle the volume necessary to service this large account. Therefore, PW is placed on a national account. This, in turn, increases the buying power of U.S. Foodservice Inc. and enables lower costs that are passed on to PW.

Now turning to a different matter regarding inventory, we look at just in time (JIT) inventory management and actual space designated for storage. PW is changing the design of the restaurants to be more space efficient. With food vendors now delivering as often as 6 days a week, product amounts held in storage are kept at a minimum. Reduced storage space lowers total costs and allows more dining space for paying guests.

PW restaurants maintain a par level of stock. Par level of stock is restaurant terminology that refers to a level of inventory that is to be maintained at all times to ensure that the restaurant never runs out of product. It is from this par level of stock or inventory that ordering of product is done. The par level of stock or inventory varies from restaurant to restaurant. Actual numbers are dependent on the volume of business a restaurant does. Also, the food item that is ordered frequently will have a higher par level of inventory. An example of low par level is grits, which are not a big seller. Management does a physical inventory on Saturday to keep sufficient stock on hand.

In most foodservice operations ordering is done on Sunday, Wednesday and Thursday. The reason for this is high volume days are on weekends. Product is delivered the next day. This allows preparation of product before the weekend. Sunday's order restocks par levels for the weekdays. PW has the option of product delivery six days a week. Most restaurants choose delivery three times a week. The reason is that more deliveries increase costs of handling product. There is a need to balance the cost of handling the products versus the cost of holding the product.

Largo Florida Pancake World

Louis Devaroe recently bought a franchise PW restaurant in Largo, Florida. Louis has exclusive ownership of this restaurant. Louis has guidelines to follow in order to use the PW name. Louis must use the food products that are PW specified. Louis must adhere to maintaining a set safety and health policy as prescribed by PW. Louis is free to pay his employees to his own specifications. Louis is able to create his own food specials as he sees fit. The actual menu items must be PW food items.

Louis was looking at different reports to help him in his operational decisions. One of the reports is the weekly manager's report (Exhibit 2) that lists gross sales, labor expenses, guest count and average dollar per guest. He knew that other expenses could be found and was curious if the profit picture was as good as it seemed. Louis had actual guest count per day. What puzzled him was the question of how many guests he had to have in order to break even. He reviewed a conventional income statement from the previous year and reconstructed a variable-cost based statement as well. The regional PW manager told Louis that the average check per quest is $7.45. Also, the regional manager told him that the restaurant had about 130,000 guests per year.

Requirements:

1. Calculate annual breakeven in number of guests for Pancake World. What is the role in the analysis of the fact that the number of guests varies from day to day?

2. With labor being one of the major expenses in operations, do you think with the aid of the weekly manager's report that the labor percentage is in line? Assume 23.5% of net sales is the standard set by corporate guidelines.

3. How can Louis use CVP to make his business more successful? Is PW highly leveraged? Should it be? What are the implications for Louis?

Solution Preview

Solutions Guide: This is meant as a solutions guide. Please try reworking the questions and reword the answers (especially essay type parts) so as to guarantee that your answer is an original. Do not submit as your own.

Pancake World (PW) is a franchise food service company with over 2,000 restaurants world-wide. A unit of PW located in Largo, Florida is the focus of this case. Louis Devaroe owns this unit under franchise rights. A brief history of the company will get us started on our understanding of this particular operation.

Company History

As the name suggests, the main focus for PW is the breakfast menu, notably pancakes. The company started in 1950 as a single unit operation in northern California. The insight by investors took this single unit operation to its prominence today. The initial philosophy was "anytime is a good time for breakfast." Now, the philosophy has changed to "come hungry, leave happy." This change in philosophy has come about by the evolution of its menu. Still offering breakfast anytime, lunch and dinner items have been incorporated to help PW compete in the ever-changing, competitive restaurant industry.

Creating value and offering quality products led to success in tough markets. These markets have a high concentration of families and senior citizens. The image as a gathering place adds to the ambience.

Growth at PW in the beginning was slow. This was due to top managements' commitment to replicate the original restaurant, keeping the atmosphere and feeling of a gathering place. Now PW is stronger than ever. This, in part, is due to other corporations that have bought exclusive rights to territories. PW has accountability systems that ensure integrity and high standards are maintained.

Exhibit 1 is a customer profile analysis used by PW to aid in demographic study of the potential market.

Tracking Costs, Payroll, and Inventory

With the aid of software specifically designed for the restaurant industry, tracking costs is not difficult. Also, outside service companies handle the company's payroll and marketing. The benefit of outsourcing these services is that it enables the company to keep its overall costs down to manageable levels, and to focus on strategy and day-to-day operations. It also allows companies such as PW to focus on improving customer service. Payroll and inventory are ...

Solution Summary

The solution discusses a thorough analysis of cost volume profit.

$2.19