Section A – BOTH questions are compulsory and MUST be attempted
Metis is a restaurant business in the city of Urbanton. Metis was started three years ago by three friends who met at university while doing courses in business and catering management. Initially, their aim was simply to ‘make money’ although they had talked about building a chain of restaurants if the first site was successful.
The three friends pooled their own capital and took out a loan from the Grand Bank in order to fit out a rented site in the city. They designed the restaurant to be light and open with a menu that reflected the most popular dishes in Urbanton regardless of any particular culinary style. The dishes were designed to be priced in the middle of the range that was common for restaurants in the city. The choice of food and drinks to offer to customers is still a group decision amongst the owners.
Other elements of the business were allocated according to each owner’s qualifications and preferences. Bert Fish takes charge of all aspects of the kitchen operations while another, Sheila Plate, manages the activities in the public area such as taking reservations, serving tables and maintaining the appearance of the restaurant. The third founder, John Sum, deals with the overall business issues such as procurement, accounting and legal matters.
Competition in the restaurant business is fierce as it is easy to open a restaurant in Urbanton and there are many competitors in the city both small, single-site operations and large national chains. The current national economic environment is one of steady but unspectacular growth.
The restaurant has been running for three years and the founders have reached the point where the business seems to be profitable and self-sustaining. The restaurant is now in need of refurbishment in order to maintain its atmosphere and this has prompted the founders to consider the future of their business. John Sum has come to you as their accountant looking for advice on aspects of performance management in the business. He has supplied you with figures outlining the recent performance of the business and the forecasts for the next year (see the performance report below). This table represents the quantitative data that is available to the founders when they meet each quarter to plan any short-term projects or initiatives and also, to consider the longer-term future. Bert and Sheila have often indicated to John that they find the information daunting and difficult to understand fully.
John Sum has come to you to advise him on the performance reporting at Metis and how it could be improved. He feels that the current report is, in some ways, too complex and, in other ways, too simple. He wants to look at different methods of measuring and presenting performance to the ownership group. As a starting point, he has suggested to you that you consider measures such as NPV, EVA？, MIRR as well as the more common profit measures. John is na？ve and wants the NPV and MIRR to be appraised as if the business was a three-year project up to 2012 so he knows the performance of the business to date. He has requested that other calculations in your performance review should be annual based on the 2012 figures although he is aware that this may be omitting in his words ‘some important detail’.
At recent meetings, Sheila has been complaining that her waiters and waitresses are not responding well to her attempts to encourage them to smile at customers although her recent drive to save electricity by getting staff to turn off unnecessary lights seems to be working. Bert stated that he was not convinced by either of Sheila’s initiatives and he wants her to make sure that food is collected from the kitchen swiftly and so delivered at the right temperature to the customer’s table. Also, Bert has said that he feels that too much food is becoming rotten and having to be thrown out. However, he is not sure what to do about it except make the kitchen staff go through lengthy inventory checks where they review the food held in store. John is worried about these complaints as there is now an air of tension in the owners’ meetings. He has been reading various books about performance management and has come across the quote, ‘What gets measured, gets done.’ He believes this is true but wants to know how it might apply in the case of his business.
Metis Performance Report
Additional notes:
1. The business was founded with $600,000 which comprised $250,000 of equity from the founders and the remainder in a loan from Grand Bank. Under the terms of the loan, all principal is repayable in 10 years’ time and interest is charged at a fixed rate of 8·4% per year.
2. John has estimated the overall cost of capital to be 12·5%.
3. The company earns 4·5% on any returns in its deposit account.
4. John wishes you to use the $600,000 original investment as the capital employed figure for analysis purposes as no new capital has been input and the owners have taken out all residual earnings so far as dividends.
5. The corporation tax rate for Metis is 30%, paid in the same year as profits are generated. Accounting depreciation is a tax allowable cost. 6. Marketing spending is for the short-term promotion of offers only.
Required:
Prepare a report to Mr John Sum addressing the following issues:
(i) Critically assess the existing performance report and suggest improvements to its content and presentation; (12 marks)
(ii) Calculate and briefly evaluate
(a) the use of John’s suggested performance measures and
(b) other profit-based measures, using the most recent year’s actual figures where appropriate as examples; (14 marks)
(iii) Assess how the quote ‘What gets measured, gets done’ could apply to Metis. (10 marks)
Professional marks will be awarded in question 1 for format, style, structure and clarity of the discussion. (4 marks)