ENTR 3120
Mini case #4 – Romano Pizza
Romano’s Pizzas, Inc operates pizza shops in several provinces. One of the company’s most profitable shops is located adjacent to the campus of a large university. A small bakery next to the shop has just gone out of business, and Romano’s Pizzas has an opportunity to lease the vacated space for $18,000 per year under a 15-year lease. Romano’s management is considering two ways in which the available space might be used.
Alternative 1
The pizza shop in this location is currently selling 40,000 pizzas per year. Management is confident that sales could be increased by 75% by taking out the wall between the pizza shop and the vacant space and expanding the pizza outlet. Costs for remodeling and for new equipment would be $550,000. Management estimates that 20% of new sales would be for small pizzas, 50% would be for medium pizzas, and 30% for large pizzas. Selling prices and costs for ingredients for the three sizes of pizzas follow (per pizza):
Selling Cost of Price Ingredients
Small $ 6.70 $ 1.30
Medium 8.90 2.40
Large 11.00 3.10
An additional $7,500 of working capital could be needed to carry the larger volume of business. This working capital would be released at the end of the lease term. The equipment would have a salvage value of $30,000 in 15 years, when the lease ends.
Alternative 2
Romano’s management is unsure which alternative to select and has asked you to help in making the decision. The company requires at 16% rate of return on all investments. You have gathered additional information that would be incurred each year under the two alternatives:
Expand the Install the
Pizza Shop Game Centre
Salaries $ 54,000 $17,000
Utilities 13,200 5,400
Insurance and other exp 7,800 9,600 Depreciation of 34,667 18,533
Note – Working Capital is treated as an initial investment at the beginning of the 15-year period. At the end it is treated in the same manner as Salvage Value.
Required Part A
As controller for the company, prepare a memo to the president of Romano with your recommended course of action. Quantitative and qualitative analysis is required to support your recommendation.
The memo should include the following:
- details regarding the existing situation - the options to consider
- your recommendation
o in one small paragraph tell the reader what the company should do and refer them to your qualitative and quantitative analysis
Support for your recommendations includes - quantitative analysis
- qualitative analysis for each option (two for each option) - other general considerations that would affect all options (2)
Part B
