Solution 6.4

a) Calculate the sensitivity of profit to a 10 per cent change

		Sales	Sales	Variable	Fixed
Restaurant		Price	Vol	Costs	Costs
Covers sold	100,000
Average selling price per meal	€ 10
	€	€	€	€	€
Sales revenue	1,000,000	1,100,000	1,100,000	1000000	1000000
Less variable costs	200,000	200000	220,000	220000	200000
		0
Contribution	800,000	900,000	880,000	780,000	800,000
Less Fixed costs	600,000	600000	600000	600000	660000
Net Profit	200,000	300,000	280,000	180,000	140,000

Increase profit		0.5	0.4	-0.1	-0.3
Increase in key variable		0.1	0.1	0.1	0.1

Profit multiplier		5	4	-1	-3

		Sales	Sales	Variable	Fixed
Outdoor catering		Price	Vol	Costs	Costs
Covers sold	100,000
Average selling price per meal	€ 10
	€	€	€	€	€
Sales revenue	1,000,000	1,100,000	1,100,000	1000000	1000000
Less variable costs	600,000	600,000	660,000	660000	600000
		0
Contribution	800,000	500,000	440,000	340,000	400,000
Less Fixed costs	200,000	200000	200000	200000	220000
Net Profit	200,000	300,000	240,000	140,000	180,000

Increase profit		0.5	0.2	-0.3	-0.1
Increase in key variable		0.1	0.1	0.1	0.1

Profit multiplier		5	2	-3	-1

b) Rank the profit multipliers in order of size

Restaurant		Outdoor catering
Sales price	5	Sales price	5
Sales Volume	4	Sale volume	2
Variable costs	1	Variable cost	3
Fixed costs	3	Fixed costs	1

c) Comment on the profit multiplier profile of the two businesses

The restaurant has a high fixed operating cost structure with fixed costs amounting to 75% of total costs. Thus it can be seen that the sales price and volume multipliers are significantly higher than the cost multipliers. Thus this business would be considered more market oriented where profit is more sensitive to the revenue side of the profit and loss account and thus the business should focus on maximising sales while at the same time controlling costs. Generally businesses with high operating gearing have to generate sufficient sales to cover the high fixed costs they create.

The outdoor catering company would be considered a more cost orient business where variable costs amount to 60% of total costs. One can see from the profit multipliers, that while sales price has the highest rating at 5, variable cost has a rating of 3 higher than sales volume. Thus this business should focus on minimising costs as least as much as maximising sales. This business would be considered to have low operating gearing where if sales are low variable costs are also low