Final Examination

Restaurant Management: Behind the Pass — comprehensive final

A note on the numbers. Every restaurant, statement, schedule, forecast, and dollar figure in this examination is a constructed teaching example. None of them describes a real business. Where a problem is labeled [the Bellwether plan], it uses the running business-plan figures developed across the book. Where it names a different restaurant, the figures are new and are meant to test whether you can transfer the method rather than recall a number.

The Fair Labor Standards Act (FLSA), the Americans with Disabilities Act (ADA), the FDA Food Code, and the SBA 7(a) program are real institutions and frameworks. Specific wage rates, thresholds, licensing costs, and health-code adoptions vary by state, county, and city. Where a problem asks you to reason about compliance, reason about the structure — you are not being asked to recite a local ordinance.

How the points are distributed

Sections C and D are 81 of the 150 points. Budget your time accordingly: roughly 25 minutes for Sections A and B together, 75 minutes for Section C, 40 minutes for Section D, and 40 minutes for Section E.

Show your arithmetic. In Sections C and D, a correct final number with no visible method earns partial credit at best; a wrong final number with a correct, legible method earns most of the credit. That is not generosity. It is the same standard a lender applies to a projection.

Section A — Short Answer (12 items, 2 points each, 24 points)

Answer in two to four sentences. Full credit requires two things: the term used correctly, and a stated consequence — what goes wrong, or what an operator does differently, because of it. A definition alone earns one point.

A1. Define prime cost, and state the specific consequence for an operator who monitors food cost percentage alone.

A2. Define the ideal-versus-actual food cost variance, and state what the variance itself is evidence of.

A3. Define turnover cost as it applies to a single hourly position, and state what changes in an operator's behavior once the figure is computed rather than assumed.

A4. Distinguish exempt from non-exempt classification under the FLSA, and state one concrete consequence of getting a salaried kitchen position wrong.

A5. Define the tip credit, and state one consequence of relying on it without meeting the conditions that permit it.

A6. Define RevPASH, and state what it reveals that covers and average check together do not.

A7. Define guest frequency and its relationship to customer lifetime value, and state the consequence for how a marketing dollar should be allocated.

A8. State the FDA Food Code cold-holding standard as commonly adopted, name the temperature danger zone, and state the operational consequence of a walk-in running four degrees warm for a week.

A9. Define channel contribution per order, and state the consequence of pricing a third-party delivery menu at dining-room prices.

A10. Define the weekly flash report, and state the consequence of relying on a monthly statement delivered three weeks after the period closes.

A11. Define margin of safety, and state what a thin margin of safety implies about how an operator should treat a proposed fixed-cost increase.

A12. Define the debt service coverage ratio (DSCR), and state one thing it cannot tell a lender about a seasonal restaurant.

Section B — Multiple Choice (15 items, 1 point each, 15 points)

Choose the single best answer.

B1. Which statement about restaurant failure is best supported by the published research?

• a. About 90% of restaurants fail in their first year.
• b. About 60% of restaurants fail in their first year.
• c. Roughly a quarter do not reach the first anniversary, and close to six in ten are gone within three years.
• d. Failure is essentially random and cannot be usefully estimated.

B2. A lease quotes base rent of \$26 per square foot and NNN charges of \$7 per square foot on 3,000 square feet. The annual occupancy cost from these two components is:

• a. \$21,000
• b. \$33,000
• c. \$78,000
• d. \$99,000

B3. On the menu-engineering matrix, an item with a high contribution margin and low popularity is a:

• a. Star
• b. Plowhorse
• c. Puzzle
• d. Dog

B4. Beginning food inventory is \$18,400, food purchases are \$41,900, ending food inventory is \$21,100, and food sales are \$132,000. Food cost percentage for the period is:

• a. 25.4%
• b. 29.7%
• c. 31.7%
• d. 32.0%

B5. A bar produces \$18,000 of beverage sales in a week at a 21% pour cost. Beverage cost of goods sold for the week is:

• a. \$3,240
• b. \$3,780
• c. \$4,320
• d. \$14,220

B6. Sales per labor hour is most useful for:

• a. setting menu prices
• b. deciding how many labor hours a forecast volume actually justifies
• c. computing prime cost
• d. measuring server upselling

B7. Under the FLSA, a non-exempt employee who works 47 hours in a single workweek must be paid:

• a. straight time for 47 hours
• b. 40 hours at the regular rate and 7 hours at 1.5 times the regular rate
• c. 40 hours at the regular rate and 7 hours at 2 times the regular rate
• d. straight time, provided the employee agreed in writing to a weekly salary

B8. The strongest operating argument for treating culture as a line item rather than a poster is that:

• a. it improves online review scores
• b. turnover is a countable cost that surfaces in food cost, labor cost, and service quality
• c. it lowers occupancy cost
• d. the FLSA requires a written culture policy

B9. A guest's second visit is worth more than the first primarily because:

• a. the average check is higher on a second visit
• b. it costs essentially nothing to acquire and contributes the same margin
• c. repeat guests carry a lower food cost
• d. repeat guests tip more

B10. RevPASH is computed as:

• a. revenue ÷ covers
• b. revenue ÷ seats
• c. revenue ÷ (available seats × hours open)
• d. covers ÷ seats

B11. Under the FDA Food Code framework as commonly adopted, cold holding is at or below:

• a. 38°F
• b. 41°F
• c. 45°F
• d. 50°F

B12. The main structural advantage of a ghost kitchen over a dining room, and its main structural risk, are:

• a. lower occupancy and lower service labor; near-total dependence on third-party channels for demand
• b. a higher average check; a higher food cost
• c. a lower food cost; a higher occupancy cost
• d. no health-department obligations; higher labor cost

B13. Compared with a dining-room cover, the most distinctive economic feature of a catering order is:

• a. a structurally lower food cost percentage
• b. revenue contracted in advance against labor you can schedule exactly
• c. exemption from sales tax
• d. higher packaging cost than third-party delivery

B14. A restaurant reports a profitable year and still misses payroll in February. The most likely explanation is:

• a. the profit-and-loss statement was computed incorrectly
• b. profit is a period result while cash is a timing question, and obligations stacked against the lowest-revenue weeks
• c. food cost was too high
• d. the owner failed to take a distribution

B15. The incremental arithmetic a prospective franchisee must run is:

• a. royalty and marketing fees against the incremental sales and cost advantages the brand actually delivers
• b. the initial franchise fee against the cost of signage and décor
• c. the royalty rate against the industry average food cost
• d. the total initial investment against the franchisor's net worth

Section C — Computation (7 problems, 56 points)

This section is the examination. Show every step. Carry dollars to the cent where the problem gives cents; round percentages to one decimal place unless told otherwise. Where a problem asks for a number and then a percentage, produce them in that order — the dollars are the fact and the percentage is a display.

C1. Build the labor line from the schedule (8 points)

The Ironwood Room (constructed teaching example) is a 60-seat neighborhood bistro serving dinner Wednesday through Sunday. Weekly sales are \$27,500. The owner's labor target is 33.0% of sales.

Here is the schedule as written, expressed in weekly hours by position.

Two positions are salaried: the chef at \$67,600 a year** and the **general manager at \$62,400 a year. The all-in wage burden — payroll taxes, workers' compensation, and the employer's share of benefits, meals, uniforms, and training — is 18.5% of wages for every position in the building.

Required:

• (a) Compute weekly wages by position, the total hourly wage cost, and the total wage cost including salaries. (2 points)
• (b) Compute the blended hourly rate across all hourly positions. (1 point)
• (c) Compute the weekly burden and the total weekly labor cost in dollars. (2 points)
• (d) Now compute labor as a percentage of sales, and state the gap to target in points and in dollars per week and per year. (2 points)
• (e) Holding the salaried positions and the blended rate constant, how many hourly hours must come out of the schedule to reach the 33.0% target? (1 point)

C2. Reclassify a salaried position (8 points)

[the Bellwether plan]

An employment attorney reviews Bellwether's Year-1 staffing plan and concludes that the sous chef — salaried at \$48,000, with no authority to hire, fire, or direct the work of others as an independent matter of judgment — does not meet the FLSA test for an exempt executive employee. The position must be reclassified as non-exempt.

The operator converts the position to hourly at \$25.20 an hour, the market rate for the role, and the sous chef continues to work a 50-hour week, 52 weeks a year. Overtime is paid at 1.5 times the regular rate for hours over 40 in a workweek.

The incremental burden on the additional wages is payroll taxes at 9.25% and workers' compensation at 2.90%. Benefits, meals, uniforms, and training do not change — it is the same person in the same job.

The plan's Year-1 figures, for reference:

The break-even basis. Chapter 32 does all of Bellwether's break-even work on its own cost basis: total fixed cost \$437,635 against a contribution margin ratio of 40.53% (0.40528645 unrounded — the book's rule is round last). Adding debt service gives \$507,135 of fixed cost plus debt service and a cash break-even of \$1,251,298, which the plan states as 77 covers a night on a stated revenue base of 37,740 annual covers at a blended check of \$41.07.

Read the bases carefully. The contribution margin ratio above belongs to Chapter 32's cost basis and must not be paired with the \$261,020 operating profit in the table, which is computed on the plan's profit-and-loss basis. Parts (c) and (d) below work on the P&L basis; part (e) works on the break-even basis. Total fixed cost is \$437,635 on both, and the reclassification adds the same dollars of fixed cost to both — which is why you can answer all five parts without reconciling them.

Required:

• (a) Compute the sous chef's new annual wages, and the increase over \$48,000. (2 points)
• (b) Compute the incremental burden and the total increase in the labor line. (1 point)
• (c) Compute the new labor line and new labor percentage; then the new prime cost in dollars and percent. (2 points)
• (d) Compute the new operating profit and the new DSCR against \$69,500 of debt service. (1 point)
• (e) The reclassified position is fixed labor. Compute the new cash break-even in dollars and in covers a night. Name the revenue base you converted on — a covers-per-night figure quoted without its base earns no credit. (2 points)

C3. Build the statement, find prime cost, sort the controllables (10 points)

The Copper Kettle (constructed teaching example) is a 96-seat casual full-service restaurant. Here are its raw annual figures, unsorted, as they came off the bookkeeper's trial balance.

THE COPPER KETTLE — raw annual lines                     [constructed teaching example]

  Food sales                          $1,344,000
  Beverage sales                        $456,000

  Food cost                             $430,080
  Beverage cost                         $100,320

  Hourly wages                          $396,000
  Management salaries                   $168,000
  Payroll taxes (9.0% of wages)          $50,760
  Workers' compensation (3.2%)           $18,048
  Benefits, meals, uniforms              $41,000

  Base rent                             $132,000
  CAM, property tax, property insurance  $34,800

  Utilities                              $61,200
  Credit card processing                 $50,580
  Marketing                              $27,000
  Repairs and maintenance                $24,600
  Smallwares and supplies                $39,800
  Technology and POS                     $18,900
  General insurance                      $21,400

  Accounting and legal                   $22,000
  Bank charges and licenses               $9,600
  Office and administration              $11,900

  Annual debt service (P&I)              $78,000

Required:

• (a) Produce the profit-and-loss statement in standard order — revenue, cost of goods sold, labor, prime cost, occupancy, other operating, general and administrative, operating profit — in dollars, with each line as a percentage of total revenue. (4 points)
• (b) Compute food cost percentage and pour cost percentage on their own sales bases. (1 point)
• (c) Compute prime cost in dollars and percent, and state what it tells you. (2 points)
• (d) Compute controllable income (revenue less cost of goods sold, labor, and other operating expenses) in dollars and percent, and show that it reconciles to operating profit. (1 point)
• (e) Compute cash remaining after debt service. (1 point)
• (f) Sort the cost lines into three buckets by the timescale on which a manager can actually move them: this week, this quarter, and not until the lease or contract renews. (1 point)

C4. Break-even, covers, and the margin of safety (7 points)

The Rivet (constructed teaching example) is a 68-seat restaurant serving dinner five nights a week, 52 weeks a year — 260 services. Annual sales are \$1,120,000 at an average check of \$34.

Its cost structure splits as follows.

Required:

• (a) Compute total variable cost as a rate and in dollars, and the contribution margin ratio. (1 point)
• (b) Compute total fixed costs and break-even sales in dollars. (2 points)
• (c) Convert break-even to covers per year and covers per night, and compare with actual covers per night. (2 points)
• (d) Compute the margin of safety in dollars, in percent, and in covers a night. (1 point)
• (e) The landlord's scheduled rent step adds \$18,000 a year to occupancy. Recompute break-even sales, break-even covers a night, and the margin of safety percentage. (1 point)

C5. Read a cash forecast fragment and find the trough (8 points)

Fern & Fig (constructed teaching example) is an established restaurant. Below are eight weeks of its cash forecast covering late January through mid-March. Cash in is deposits net of card processing fees, including the 7% sales tax collected from guests. Payroll is paid biweekly, in even-numbered weeks. Rent is paid at the start of each month. Debt service is paid monthly. Sales tax collected is remitted monthly, on the twentieth, for the prior month.

The opening balance at the start of Week 1 is \$26,000.

FERN & FIG — eight-week cash forecast fragment            [constructed teaching example]

  Wk   Cash in   Purch   Payroll    Rent   Other   Debt   Sales tax   Lump sum        Balance
  ---------------------------------------------------------------------------------------------
   1    25,680   7,400        —    8,200   3,500   4,650         —          —          27,930
   2    24,075   6,900   15,200        —   3,300      —          —          —          26,605
   3    22,470   6,400        —        —   3,200      —      6,900          —          32,575
   4    21,400   6,100   14,400        —   3,100      —          —          —          30,375
   5    20,330   5,800        —    8,200   3,000   4,650         —     14,400  (A)          ?
   6    19,795   5,600   13,600        —   2,900      —          —      5,200  (B)          ?
   7    20,865   5,900        —        —   3,000      —      6,125          —               ?
   8    24,610   6,700   13,900        —   3,200   4,650         —          —               ?

  (A)  Annual general-liability and property insurance premium, billed once a year.
  (B)  Quarterly workers' compensation deposit.

  The operator holds a stated minimum operating balance of $15,000 — roughly one payroll
  run plus the cash float in the drawers and the safe.

Required:

• (a) Complete the balance column for Weeks 5 through 8. (2 points)
• (b) Identify the trough week and its balance. (1 point)
• (c) Name the obligations that collided to create it, and identify which of them were knowable twelve months in advance. (2 points)
• (d) Compute the peak-to-trough drawdown, and state how far below the \$15,000 minimum the business falls at the worst point. (2 points)
• (e) The insurance carrier offers monthly installments of \$1,200 instead of the annual \$14,400 premium, with installments falling in Weeks 5, 9, and 13. Recompute the Week 5 through Week 8 balances and state the new trough. (1 point)

C6. EBITDA is not cash (7 points)

The Sable Room (constructed teaching example) is a single-unit restaurant organized as a pass-through entity; the business itself pays no income tax. Its accountant reports the following for the year:

Additional facts that do not appear on the profit-and-loss statement:

• Total annual debt service (principal and interest) is \$148,000.
• Maintenance capital expenditure — the walk-in compressor, the point-of-sale replacement cycle, the hood cleaning and equipment rebuilds that keep the restaurant able to open — averages \$45,000 a year and is not optional.

Required:

• (a) Compute EBITDA. (1 point)
• (b) Compute the annual principal component of debt service, and explain in one sentence why it does not appear on the profit-and-loss statement. (1 point)
• (c) Compute cash available after debt service, and then after maintenance capital expenditure. (2 points)
• (d) Compute DSCR on EBITDA and DSCR on EBITDA less maintenance capital expenditure. State which figure a lender testing a 1.25× covenant should care about, and why. (2 points)
• (e) The owner, told the restaurant "makes \$209,000 of EBITDA," takes a **\$90,000 distribution. State the specific wrong decision, the dollar consequence, and what the money is actually being taken from. (1 point)

C7. Channel contribution, and the displacement question (8 points)

Marrow & Vine (constructed teaching example) runs a third-party delivery channel from its dining-room kitchen, five nights a week, at 22 orders a night. Delivery is priced from the dining-room menu with no markup.

Delivery labor: one packer/expediter works 5 hours a night at \$17.50 an hour, plus 12.15% statutory burden. That person does nothing but delivery.

Required:

• (a) Compute the delivery labor cost per order. (1 point)
• (b) Compute contribution per delivery order in dollars and as a percentage of order value. (2 points)
• (c) Compute contribution per dining-room cover in dollars and as a percentage of check. (1 point)
• (d) Compute the channel's naive annual contribution — 22 orders a night, five nights, 52 weeks. (1 point)
• (e) The displacement question. The kitchen is at capacity from 7:00 to 8:30. Eight of the 22 nightly orders fall inside that window, and each one displaces exactly one dining-room cover that the restaurant could otherwise have seated. Compute the channel's true annual contribution after displacement, and the annual dollars destroyed by the eight peak orders. (2 points)
• (f) State the decision, and one alternative to switching the channel off at peak, with its arithmetic. (1 point)

Section D — Reading an Artifact (2 items, 25 points)

Both artifacts are constructed. Both are the kind of document that lands on an operator's desk with no explanation attached. Read them the way you would read them on a Monday morning.

D1. A full-year profit-and-loss statement (13 points)

THE BELMONT ROOM — ANNUAL PROFIT AND LOSS                  [constructed teaching example]
88 seats  ·  full service  ·  dinner six nights plus weekend brunch  ·  year four

                                       YEAR 4                      YEAR 3
                                   Dollars      %             Dollars      %
  --------------------------------------------------------------------------------
  Food sales                     $1,027,600                 $1,084,780
  Beverage sales                   $372,400                   $401,220
  TOTAL REVENUE                  $1,400,000   100.0%        $1,486,000   100.0%

  Food cost                        $349,384    34.0% (a)
  Beverage cost                     $93,100    25.0% (b)
  TOTAL COST OF GOODS SOLD         $442,484    31.6%          $449,000    30.2%

  Hourly wages                     $328,000
  Salaries                         $156,000
  Payroll taxes and workers' comp   $58,080
  Benefits, meals, uniforms         $29,500
  TOTAL LABOR                      $571,580    40.8%          $549,000    36.9%
  --------------------------------------------------------------------------------
  PRIME COST                     $1,014,064    72.4%          $998,000    67.2%

  Base rent                        $114,000
  CAM, property tax, insurance      $28,900
  TOTAL OCCUPANCY                  $142,900    10.2%          $138,600     9.3%

  Utilities                         $54,600
  Card processing                   $39,340
  Marketing                         $16,800
  Repairs and maintenance           $31,200
  Smallwares, supplies, laundry     $34,700
  Technology and delivery software  $14,900
  General insurance                 $18,600
  TOTAL OTHER OPERATING            $210,140    15.0%          $219,900    14.8%

  General and administrative        $47,600     3.4%           $45,800     3.1%
  --------------------------------------------------------------------------------
  OPERATING PROFIT (EBITDA)        -$14,704    -1.1%           $83,700     5.6%

  Depreciation and amortization     $62,000
  Interest                          $28,400
  --------------------------------------------------------------------------------
  NET INCOME (LOSS)               -$105,104    -7.5%

  (a) as a percentage of food sales      (b) as a percentage of beverage sales

Required:

• (a) Compute prime cost as a percentage of revenue for both years, and state the change in points. (2 points)
• (b) Identify the cost line that moved most in dollars. Then identify the two cost lines that fell in dollars and still rose as a percentage of sales, and explain how both things can be true at once. (2 points)
• (c) What it shows. Give three defensible readings — things these numbers actually support. (3 points)
• (d) What it does not show. Name five things this statement cannot tell you, and for each one say why it matters to the decision in part (e). (4 points)
• (e) What you do first. You take over as general manager on the second Monday of January. Name the first thing you do and the first number you build, and defend the choice against the obvious alternatives. (2 points)

D2. A thirteen-week cash forecast (12 points)

Sparrow & Stone (constructed teaching example) is an established 72-seat restaurant in its sixth year. This is the forecast the owner built in the first week of January, covering January through the end of March. Cash in is deposits net of card fees, including sales tax collected. Payroll is all-in — net pay, withholdings, and employer taxes — and runs biweekly in even weeks.

The opening balance at the start of Week 1 is \$34,000. The owner's stated minimum operating balance is \$25,000 — one payroll run plus a week of purchases and float.

SPARROW & STONE — THIRTEEN-WEEK CASH FORECAST               [constructed teaching example]

  Wk   Cash in  Purch  Payroll   Rent  Other  Debt  Sales tax  Lump      Total out   Balance
  --------------------------------------------------------------------------------------------
   1    30,400  8,500       —   9,600  4,300     —         —      —         22,400    42,000
   2    29,100  8,100  19,600       —  4,100  4,900        —      —         36,700    34,400
   3    27,800  7,800       —       —  4,000     —      9,800     —         21,600    40,600
   4    26,500  7,400  18,900       —  3,900     —         —      —         30,200    36,900
   5    25,200  7,100       —   9,600  3,800     —         —  14,800 (A)    35,300    26,800
   6    23,900  6,700  17,800       —  3,700  4,900        —      —         33,100    17,600
   7    23,400  6,500       —       —  3,600     —      7,600   5,400 (B)   23,100    17,900
   8    24,600  6,900  17,600       —  3,700     —         —   3,900 (C)    32,100    10,400
   9    27,200  7,600       —       —  3,900     —         —      —         11,500    26,100
  10    29,800  8,300  18,800   9,600  4,100     —         —      —         40,800    15,100
  11    31,500  8,800       —       —  4,300  4,900        —   6,800 (D)    24,800    21,800
  12    33,200  9,300  20,400       —  4,400     —      6,300     —         40,400    14,600
  13    34,800  9,700       —       —  4,500     —         —      —         14,200    35,200
  --------------------------------------------------------------------------------------------
       367,400 102,700 113,100  28,800 52,300 14,700   23,700  30,900      366,200

  (A) Annual general-liability and property insurance premium
  (B) Workers' compensation annual audit and true-up
  (C) Liquor license renewal
  (D) Walk-in compressor replacement — the unit failed on a Saturday in March

  Receipts fall 23% from Week 1 to Week 7. Payroll falls 10% over the same span.

Required:

• (a) Identify the trough: which week, what balance. (2 points)
• (b) Compute the peak-to-trough drawdown in dollars. (2 points)
• (c) How many of the thirteen weeks fall below the \$25,000 minimum operating balance, and by how much does the business miss it at the worst point? (2 points)
• (d) How much working capital did this business actually need, and in what form? Give a number and defend the instrument you would use. (3 points)
• (e) Name three things you would have changed twelve weeks earlier — in October, before any of this happened — and give the dollar effect of at least one of them on the trough. (3 points)

Section E — Extended Response (answer 2 of 4, 15 points each, 30 points)

Choose two. Write roughly 500–800 words each. You are being graded on judgment, on whether your argument is carried by specific numbers, and on whether you state honestly what your position costs. An answer that only asserts a preference earns half credit at most.

E1. The covenant that cannot see February. [the Bellwether plan]

The lender approves Bellwether's SBA 7(a) request: \$335,000, with conditions. The owner injection rises from \$120,000 to **\$150,000. A \$40,000 working-capital reserve is held in a controlled account and released against milestones. There are personal guarantees, a lien on business assets, and a landlord collateral-access agreement. And there is a financial covenant: a debt service coverage ratio of 1.25×, tested annually**.

The credit memo also flags, in its own words, that the Year-1 labor line looks optimistic by about three points.

Here is the plan's scenario table against annual debt service of \$69,500:

Nothing trips it. The covenant does not bind in any modeled scenario, including the one the lender's own analyst wrote down as the likely miss.

And the operating account still goes negative in the week of February 19.

Take a position. Propose the covenant you would attach instead. Defend why yours would catch what this one misses. And state honestly what your proposal would cost the borrower — in money, in flexibility, in reporting burden, and in the risk of a technical default on a business that is fundamentally sound.

E2. Trace a wage-and-hour decision through to the operating statement.

A 110-seat restaurant pays its two kitchen supervisors a salary of \$52,000 each. Both spend the overwhelming majority of their time cooking on the line. Both routinely work 54 hours a week. Neither hires, fires, or exercises independent judgment over the work of others. The owner has been told by a friend in the industry that "salaried means no overtime."

Trace this decision all the way through. What does the FLSA classification test actually turn on? What is the exposure if the classification is wrong — not just the back wages? Quantify the effect of lawful reclassification on the labor line and on prime cost for a restaurant doing \$2.4 million in sales. Then argue what the operator should do, and when, and explain why the cheapest moment to fix a classification problem is always before someone else finds it. Note where jurisdiction matters and where the reader must verify locally.

E3. Grow or consolidate.

A profitable single-unit operator with \$1.9 million in sales, a 58% prime cost, and \$240,000 of operating profit is offered a second location on good terms. The owner works six days a week, writes every schedule, does the ordering, runs the Friday and Saturday expo, and is the only person in the building who can close the books.

Argue for or against the second unit. Your argument must be built on owner dependency as a measurable condition, not as a feeling — say what you would measure, what threshold would change your answer, and what the first unit's numbers would have to look like for six months before you would sign anything. Address what happens to unit one during the second unit's opening, and what a second unit does to the cash profile even when it does nothing bad to the profit profile.

E4. Recoverable or not.

A restaurant is in its third year. Sales have fallen 9% year over year. Prime cost is 69%. Occupancy is 11% of sales. The bank balance covers about nine days of operating outflow. The lease has six years remaining with two scheduled escalations. The chef-owner is exhausted, the reviews are drifting down, and a competitor with a similar concept opened four blocks away in the spring.

Diagnose it. Separate what is recoverable by operating differently from what is structural and cannot be fixed from inside the four walls. For each recoverable item, say what you would do and how long the fix would take to show up in the numbers. For each unrecoverable item, say what it forecloses. Then state the decision you would recommend and the date by which it has to be made — and defend why an honest, early exit is sometimes the most professional act available to an operator.

Solutions

Instructor note. Every computation below has been worked end to end and every statement foots. Where a student's method is right and an arithmetic slip carries through, award the method points and deduct once — not at every downstream line. In Section C, the item that most reliably separates students who understand the material from students who have memorized it is C2(e) and C7(e): both require carrying a change through to a different statement, which is the actual skill.

Solutions — Section A (2 points each; 1 for the definition, 1 for the consequence)

A1. Prime cost. Cost of goods sold — food and beverage — plus total labor including wages, payroll taxes, and benefits for everyone in the building, expressed as a percentage of total sales. Full service targets 60% or below. Consequence: the two halves trade against each other. An operator watching food cost alone can hold a 26% food cost while buying it with scratch labor at 39%, land at 65% prime, and believe the kitchen is being run well. Food cost percentage is the most-quoted number in the industry and routinely the wrong one.

A2. Ideal-versus-actual food cost variance. The gap between theoretical usage — what the recipes and the menu mix say you should have used — and counted usage from beginning inventory plus purchases minus ending inventory. Consequence: the variance is the waste, theft, over-portioning, mis-keyed items, and uncosted specials. An operator who computes only actual food cost knows a number is bad; the variance is what tells them which of six causes to go look at, and it is the only version of the calculation that survives a busy month.

A3. Turnover cost. The full countable cost of one departure and replacement in a specific position: recruiting and posting, interviewing time, onboarding and paperwork, training hours paid to both trainee and trainer, the reduced output of a green employee, the errors and comps during the learning curve, and the guest who does not return. Consequence: until it is a number, nobody funds prevention. Once an operator can say a line cook departure costs a specific figure, a \$1.25 raise or a written training program stops being an expense and becomes an investment with a payback period.

A4. Exempt versus non-exempt. Non-exempt employees are entitled to overtime at 1.5 times the regular rate for hours over 40 in a workweek; exempt employees are not. Exemption turns on the actual duties performed and a salary threshold — not on being paid a salary, and not on a job title. Consequence: a "kitchen manager" who spends the shift cooking on the line and has no independent authority is likely non-exempt regardless of the salary. Getting it wrong creates back-wage liability for the overtime that should have been paid, potential liquidated damages and penalties, and a labor line that was understated for as long as the error ran — which means the P&L, the prime cost, and the break-even the operator has been planning against were all wrong too. Specifics vary by jurisdiction; verify locally and use counsel.

A5. Tip credit. A provision of the FLSA permitting an employer, in jurisdictions that allow it, to count a portion of an employee's tips toward the minimum wage obligation, paying a lower direct cash wage. Consequence: the credit is conditional — on notice to the employee, on tips actually bringing the employee to at least the full minimum wage in every workweek, and on lawful handling of tip pools. Fail a condition and the employer owes the full minimum wage for the whole period, not the difference. Several states do not permit a tip credit at all; the wage model must be built for the jurisdiction, not from a textbook.

A6. RevPASH. Revenue per available seat-hour: revenue divided by (available seats × hours open). Consequence: covers and average check can both look healthy while a room is nearly empty for three of its five open hours. RevPASH treats a seat-hour as the perishable inventory it actually is, and it is the number that tells you whether the answer is more people, a higher check, faster pacing, or shorter hours — four different problems that covers-and-check cannot distinguish.

A7. Frequency and lifetime value. Frequency is how often a given guest returns in a period; lifetime value is the total contribution margin that guest produces across the whole relationship. Consequence: a first visit is expensive to buy and contributes one margin; every subsequent visit costs essentially nothing to acquire and contributes the same margin. So a marketing dollar spent moving a guest from three visits a year to five is almost always worth more than a dollar spent acquiring a stranger — and most restaurant marketing budgets are pointed the other way.

A8. Cold holding and the danger zone. Under the FDA Food Code framework as commonly adopted, cold holding is at or below 41°F, hot holding at or above 135°F, and the temperature danger zone is the span between them. Local adoption varies. Consequence: a walk-in at 45°F for a week has not merely shortened shelf life. Everything time-and-temperature-controlled inside it has been accumulating unsafe time; the correct response is to discard product that cannot be verified, not to cook it harder. The cost is a real inventory write-off, and the alternative cost — a foodborne illness incident — is not a cost line, it is the end of the business.

A9. Channel contribution per order. The dollars an order contributes after every cost that order actually causes: commission, food, packaging, and the labor staffed to serve the channel — not gross channel revenue and not the restaurant's blended margin. Consequence: pricing a third-party delivery menu at dining-room prices hands roughly a quarter to a third of the order to the platform out of a margin that was built for a channel with no commission. The operator sees channel revenue rising and believes the business is growing, while contribution per order may be half the dining room's and, at peak, negative.

A10. The weekly flash report. A one-page report produced within days of a week's close, carrying sales, covers, food and beverage cost from a real count, labor from payroll, and therefore prime cost — the operator's decision variables, weekly. Consequence: a monthly statement arriving three weeks after close means an operator learns about a problem roughly seven weeks after it began. Seven weeks of a four-point overrun on a \$23,000-a-week restaurant is about \$6,400 — and, worse, seven weeks in which the cause became a habit. The flash report moves discovery from month sixteen to week one.

A11. Margin of safety. The distance between actual sales and break-even sales, expressed in dollars, percent, or covers a night. Consequence: it is the correct lens for any proposed fixed cost. A restaurant with a 14% margin of safety that adds \$18,000 of annual fixed cost is not "spending \$18,000" — it is moving break-even up by \$18,000 divided by the contribution margin ratio, consuming several points of the only cushion it has. A thin margin of safety means fixed-cost increases must be treated as strategic decisions, not purchases.

A12. Debt service coverage ratio. Net operating income divided by total debt service; a lender typically wants 1.20× to 1.35×. Consequence for a seasonal restaurant: DSCR is an annual ratio built from a full-year number. It cannot see when the money arrives. A restaurant can clear a 1.25× covenant at 3.0× and still have an operating account that goes negative in February, because the covenant measures a year and the risk is weekly. DSCR tells a lender whether a business can cover its debt over a year; it says nothing at all about whether the business will still be open in March.

Solutions — Section B (1 point each)

Solutions — Section C

C1. Build the labor line from the schedule (8 points)

(a) Wages by position (2 points)

(b) Blended hourly rate (1 point)

\$5,660.00 ÷ 371 hours = **\$15.26 an hour** (\$15.2561 unrounded; carry the unrounded figure into (e)).

(c) Burden and the labor line (2 points)

• Burden: \$8,160.00 × 0.185 = **\$1,509.60**
• Total weekly labor cost: \$8,160.00 + \$1,509.60 = \$9,669.60

(d) Now the percentage (2 points)

• \$9,669.60 ÷ \$27,500 = 35.2% (0.351622 unrounded)
• Target: \$27,500 × 0.33 = \$9,075.00
• Gap: 35.2% − 33.0% = 2.2 points
• In dollars: \$9,669.60 − \$9,075.00 = \$594.60 a week**, or **\$30,919.20 a year

The order matters. The schedule produces hours; hours and rates produce dollars; burden produces the labor line; and only then does a percentage exist. An operator who starts from "we run 33% labor" and works backward to a schedule has invented the number and will hit it only by accident.

(e) Hours to remove (1 point)

The salaried positions cannot be scheduled away, so they consume their share of the target first:

  Target labor dollars           $27,500 x 0.33            = $9,075.00
  Salaried, all-in               $2,500.00 x 1.185         = $2,962.50
  ----------------------------------------------------------------------
  Hourly labor budget, all-in                                $6,112.50
  Hourly wages allowed           $6,112.50 / 1.185         = $5,158.23
  Hours allowed                  $5,158.23 / $15.2561      =    338.1
  Hours scheduled                                               371.0
  ----------------------------------------------------------------------
  HOURS TO REMOVE                                              ~32.9  -> 33 hours

About 33 hours a week must come out — roughly three shifts. Check: 33 hours × \$15.2561 = \$503.45 of wages; × 1.185 = \$596.59 of labor cost, against a required reduction of \$594.60. It clears.

Note what this does not tell you: which 33 hours. That is a service-quality decision, not an arithmetic one, and it is where the schedule stops being a spreadsheet.

C2. Reclassify a salaried position (8 points)

(a) New wages (2 points)

  Regular:   40 hours x $25.20                    =   $1,008.00 / week
  Overtime:  10 hours x $25.20 x 1.5 = $37.80     =     $378.00 / week
  ----------------------------------------------------------------------
  Weekly                                              $1,386.00
  Annual     $1,386.00 x 52                       =  $72,072.00
  Prior salary                                       -$48,000.00
  ----------------------------------------------------------------------
  INCREASE IN WAGES                                  $24,072.00

(b) Burden and the labor line (1 point)

• Payroll taxes: \$24,072.00 × 0.0925 = \$2,226.66
• Workers' compensation: \$24,072.00 × 0.0290 = \$698.09
• Incremental burden: \$2,924.75
• Total increase in the labor line: \$24,072.00 + \$2,924.75 = \$26,996.75

Benefits, meals, uniforms, and training do not move — same person, same job. Students who apply the full 20.5% wage burden to the increment have made a defensible but slightly overstated assumption; award the point if the reasoning is stated.

(c) The labor line and prime cost (2 points)

Labor moves 1.7 points; prime cost moves 1.8 points and crosses the 60% line the entire plan was built to hold. One position, correctly classified, is the difference between a plan that meets its own benchmark and one that does not.

(d) Operating profit and DSCR (1 point)

• Operating profit: \$261,020 − \$26,996.75 = \$234,023.25 (15.1% of sales, down from 16.8%)
• DSCR: \$234,023.25 ÷ \$69,500 = 3.37× (down from 3.76×)

(e) The new break-even (2 points)

The reclassified sous chef is fixed labor — that cost exists whether the room does 40 covers or 140 — so the whole \$26,996.75 lands on the fixed base and is recovered only through contribution margin. Round last: divide by the unrounded 0.40528645, not by the displayed 40.53%.

  Total fixed cost                                   $437,635.00
  plus annual debt service                            $69,500.00
  ----------------------------------------------------------------------
  Fixed cost plus debt service, BEFORE               $507,135.00
  Cash break-even, before   $507,135.00 / 0.40528645  = $1,251,298

  plus the reclassification                           $26,996.75
  ----------------------------------------------------------------------
  Fixed cost plus debt service, AFTER                $534,131.75
  Cash break-even, after    $534,131.75 / 0.40528645  = $1,317,910

Equivalently, the increment alone: \$26,996.75 ÷ 0.40528645 = **\$66,612 of additional sales. The fixed-cost multiplier is 1 ÷ 0.40528645 = \$2.47 of sales for every \$1 of fixed cost** — the most useful single number to carry into any conversation about adding a salaried position.

Converting to covers, with the base named. Chapter 32 converts on the plan's stated revenue base: 37,740 annual covers — 36,140 in the dining room and at the bar, plus the seasonal patio — at a blended check of \$41.07. On that base:

Four more covers every single night, forever, to stand still. That is what one classification decision costs, and it is invisible on any statement that reports only percentages. For scale, the plan's margin of safety against accounting break-even is \$1,550,000 − \$1,079,815 = \$470,185, or 30.3% — comfortable, and roughly six points of it are consumed by this one position.

(Two grading notes. First, the plan publishes the reclassified break-even as \$1,317,918 because it carries the reclassification at a round \$27,000; this item's parameters produce \$26,996.75, so a correct student answer lands at about \$1,317,910. Accept \$1,317,900 to \$1,317,920 — the whole range rounds to 81 covers. Do not accept an answer computed by dividing by the displayed 0.4053 and then presenting the result to the dollar as though it were exact. Second, deduct if the student converts to covers without naming the base. An unnamed base manufactures a phantom \$51.64 average check and overstates break-even by roughly seven covers a night — the specific error Chapter 32 warns against.)

(Instructor note on the two cost bases. The 40.53% contribution margin ratio belongs to Chapter 32's cost basis, on which Bellwether's operating profit is \$190,559 — it must never be paired with the \$261,020 used in parts (c) and (d), which sits on the plan's P&L basis with its \$500,000 labor line and a 45.07% contribution margin. Total fixed cost is **\$437,635 on both bases; the difference between them is entirely in how much labor is treated as variable (\$308,105 versus \$378,566). The reclassification adds the same \$26,996.75 of fixed cost to either, which is why part (e) is answerable without reconciling the two. A student who computes break-even by taking \$1,288,980 of total costs, subtracting a variable share, and then applying 40.53% has mixed the bases; mark it, because it is the single most common way to get a plausible and wrong break-even.)

C3. Build the statement, find prime cost, sort the controllables (10 points)

(a) The statement (4 points — 1 for correct order and grouping, 1 for COGS and labor, 1 for the expense groupings, 1 for operating profit and the percentage column)

THE COPPER KETTLE — ANNUAL PROFIT AND LOSS                 [constructed teaching example]

                                            Dollars        % of revenue
  ----------------------------------------------------------------------
  Food sales                              $1,344,000            74.7%
  Beverage sales                            $456,000            25.3%
  TOTAL REVENUE                           $1,800,000           100.0%

  Food cost                                 $430,080
  Beverage cost                             $100,320
  TOTAL COST OF GOODS SOLD                  $530,400            29.5%

  Hourly wages                              $396,000
  Management salaries                       $168,000
  Payroll taxes                              $50,760
  Workers' compensation                      $18,048
  Benefits, meals, uniforms                  $41,000
  TOTAL LABOR                               $673,808            37.4%
  ----------------------------------------------------------------------
  PRIME COST                              $1,204,208            66.9%

  Base rent                                 $132,000
  CAM, property tax, property insurance      $34,800
  TOTAL OCCUPANCY                           $166,800             9.3%

  Utilities                                  $61,200
  Credit card processing                     $50,580
  Marketing                                  $27,000
  Repairs and maintenance                    $24,600
  Smallwares and supplies                    $39,800
  Technology and POS                         $18,900
  General insurance                          $21,400
  TOTAL OTHER OPERATING                     $243,480            13.5%

  Accounting and legal                       $22,000
  Bank charges and licenses                   $9,600
  Office and administration                  $11,900
  TOTAL GENERAL AND ADMINISTRATIVE           $43,500             2.4%
  ----------------------------------------------------------------------
  TOTAL OPERATING COSTS                   $1,657,988            92.1%
  OPERATING PROFIT                          $142,012             7.9%

  Debt service (principal and interest)      $78,000
  ----------------------------------------------------------------------
  CASH AFTER DEBT SERVICE                    $64,012             3.6%

(b) Cost percentages on their own bases (1 point)

• Food cost: \$430,080 ÷ \$1,344,000 = 32.0%
• Pour cost: \$100,320 ÷ \$456,000 = 22.0%

Note the discipline: food cost is measured against food sales, not total sales. Dividing food cost by total revenue produces a comfortable-looking 23.9% that means nothing.

(c) Prime cost (2 points)

\$530,400 + \$673,808 = \$1,204,208 = 66.9% of sales.

Out of every dollar through the register, sixty-seven cents is gone before the rent is paid. Against a full-service benchmark of 60% or below, this restaurant is roughly seven points heavy — about \$124,000 a year on this volume, which is almost exactly the operating profit. The heavy half is labor at 37.4%, not cost of goods sold at 29.5%. A student who diagnoses "the food cost is too high" here has read the wrong line.

(d) Controllable income (1 point)

  Total revenue                             $1,800,000
  less cost of goods sold                     -$530,400
  less labor                                  -$673,808
  less other operating                        -$243,480
  ----------------------------------------------------------------------
  CONTROLLABLE INCOME                         $352,312           19.6%

  less occupancy                              -$166,800
  less general and administrative              -$43,500
  ----------------------------------------------------------------------
  OPERATING PROFIT                            $142,012            7.9%     (reconciles)

(e) Cash after debt service (1 point)

\$142,012 − \$78,000 = \$64,012, or 3.6% of sales — before any owner distribution, any principal on equipment leases outside this figure, and any capital expenditure. On \$1.8 million of sales, that is the entire cushion.

(f) Controllable on what timescale (1 point)

The point of the sort is not tidiness. Prime cost is almost exactly the left-hand column — which is why prime cost is the number an operator manages weekly and why an operator staring at an occupancy line in February is staring at a decision they made two years ago.

C4. Break-even, covers, and the margin of safety (7 points)

(a) Variable costs and the contribution margin ratio (1 point)

• Variable rate: 30.5% + 20.0% + 7.5% = 58.0%
• Variable dollars: \$1,120,000 × 0.58 = **\$649,600**
• Contribution margin ratio: 100.0% − 58.0% = 42.0%; in dollars, \$1,120,000 × 0.42 = \$470,400

Every dollar of sales leaves forty-two cents to cover fixed costs and then to be profit.

(b) Fixed costs and break-even sales (2 points)

  Fixed labor (salaried, all-in)              $196,000
  Occupancy                                    $92,400
  Fixed other operating                        $76,600
  General and administrative                   $38,000
  ----------------------------------------------------------------------
  TOTAL FIXED COSTS                           $403,000

  Break-even sales = $403,000 / 0.42        = $959,524

Check: \$959,524 × 0.42 = \$403,000. The contribution exactly covers the fixed base and nothing is left. Operating profit at actual volume is \$470,400 − \$403,000 = \$67,400 (6.0% of sales).

(c) Break-even in covers (2 points)

• Break-even covers per year: \$959,524 ÷ \$34 = 28,221 covers
• Per night: 28,221 ÷ 260 services = 108.5 → 109 covers a night
• Actual covers per year: \$1,120,000 ÷ \$34 = 32,941; per night: 32,941 ÷ 260 = 126.7 → 127 covers a night

This is the translation that makes break-even useful. "\$959,524" is a number for a lender. "One hundred and nine people through the door every night we are open" is a number a manager can stand in a dining room and count against.

And the base must be named. The conversion above rests on a stated base — a \$34 average check across 260 dinner services. A covers-per-night break-even quoted without its base is not a number, it is a rumor: change the check average or the number of services and the identical sales figure produces a different count. Award the point to a student who states the base even if the arithmetic slips; withhold it from a student who produces "109" with no base attached.

(d) Margin of safety (1 point)

• In dollars: \$1,120,000 − \$959,524 = \$160,476
• In percent: \$160,476 ÷ \$1,120,000 = 14.3%
• In covers: 126.7 − 108.5 = about 18 covers a night

Eighteen covers a night is roughly four and a half tables. That is the entire distance between this restaurant and break-even, and it is worth saying out loud in a staff meeting.

(e) After the rent step (1 point)

  New fixed costs      $403,000 + $18,000              = $421,000
  New break-even       $421,000 / 0.42                 = $1,002,381
  New break-even covers per night
                       $1,002,381 / $34 / 260          = 113.4 -> 114 covers
  New margin of safety ($1,120,000 - $1,002,381) / $1,120,000 = 10.5%

\$18,000 of rent moved break-even by \$42,857 and consumed 3.8 points of the margin of safety. That is the lesson: a fixed cost is not what it costs, it is what it costs divided by the contribution margin ratio. The operator now needs five more covers a night, every night, to be exactly where they were — and operating profit falls to \$49,400.

C5. Read a cash forecast fragment and find the trough (8 points)

(a) The balances (2 points)

  Wk   Cash in    Total out                                          Net      Balance
  --------------------------------------------------------------------------------------
   5    20,330    5,800 + 8,200 + 3,000 + 4,650 + 14,400 = 36,050  -15,720     14,655
   6    19,795    5,600 + 13,600 + 2,900 + 5,200         = 27,300   -7,505      7,150
   7    20,865    5,900 + 3,000 + 6,125                  = 15,025   +5,840     12,990
   8    24,610    6,700 + 13,900 + 3,200 + 4,650         = 28,450   -3,840      9,150

(b) The trough (1 point)

Week 6, at \$7,150.

(c) What collided, and what was knowable (2 points)

Four obligations stacked into two weeks against the lowest receipts of the eight:

1. Rent (Week 5, \$8,200) — knowable the day the lease was signed.
2. The annual insurance premium (Week 5, \$14,400) — knowable a year in advance; it arrives on the same date every year.
3. The quarterly workers' compensation deposit (Week 6, \$5,200) — knowable a quarter in advance.
4. A biweekly payroll (Week 6, \$13,600) plus **monthly debt service** (Week 5, \$4,650) — both fixed on a calendar nobody can move.

Every one of them was knowable in advance. Nothing surprising happened. That is the whole point of the item: cash troughs in restaurants are almost never caused by unforeseeable events. They are caused by foreseeable events landing together in the weeks when receipts are lowest, in a business that never laid the calendar over the forecast.

One more thing worth naming: the Week 3 sales-tax remittance of \$6,900 was money collected from guests in the prior, stronger month. It had been sitting in the account for weeks making the balance look healthier than it was. It was never the restaurant's money.

(d) Drawdown and the shortfall (2 points)

• Peak balance: Week 3, \$32,575
• Trough: Week 6, \$7,150
• Peak-to-trough drawdown: \$32,575 − \$7,150 = \$25,425
• Against a \$15,000 minimum operating balance, the business is **\$7,850 short at the trough (\$15,000 − \$7,150), and it is below its minimum in Weeks 6, 7, and 8** — three consecutive weeks.

(e) The cheapest fix (1 point)

Financing the insurance premium removes \$13,200 from Week 5 (\$14,400 replaced by a \$1,200 installment) and the next installment does not fall until Week 9:

  Wk   Total out (revised)                        Net       Balance
  ------------------------------------------------------------------
   5   36,050 - 14,400 + 1,200 = 22,850         -2,520      27,855
   6   27,300                                   -7,505      20,350
   7   15,025                                   +5,840      26,190
   8   28,450                                   -3,840      22,350

**New trough: Week 6, \$20,350** — above the \$15,000 minimum in every week of the fragment. A single phone call to the insurance carrier, made in the autumn, is worth \$13,200 of February liquidity. It will carry a small financing charge, and it is dramatically cheaper than a line of credit drawn under pressure — or than the conversation with a produce vendor about a late check.

C6. EBITDA is not cash (7 points)

(a) EBITDA (1 point)

  Net income                                     $78,400
  add back depreciation and amortization         $96,000
  add back interest                              $34,600
  ----------------------------------------------------------
  EBITDA                                        $209,000

No tax add-back: the entity is a pass-through and pays none. (Its owner does, personally, out of cash this statement never mentions — worth flagging as a fifth thing the number hides.)

(b) Principal (1 point)

\$148,000 − \$34,600 = \$113,400 of principal.

Principal is a repayment of borrowed money, not an expense — it reduces a liability rather than consuming a resource, so it never appears on the profit-and-loss statement. It comes out of the bank account all the same.

(c) Cash (2 points)

  EBITDA                                        $209,000
  less total debt service                       -$148,000
  ----------------------------------------------------------
  Cash after debt service                        $61,000
  less maintenance capital expenditure           -$45,000
  ----------------------------------------------------------
  CASH ACTUALLY AVAILABLE                        $16,000

(d) Two coverage ratios (2 points)

• DSCR on EBITDA: \$209,000 ÷ \$148,000 = 1.41×
• DSCR on EBITDA less maintenance capital expenditure: \$164,000 ÷ \$148,000 = 1.11×

A lender testing a 1.25× covenant should care about the second. The first passes; the second fails. The difference is \$45,000 of capital expenditure that is not discretionary — a restaurant that does not replace the walk-in compressor is a restaurant that stops being able to open. Depreciation was added back as a non-cash charge, which is arithmetically correct and economically misleading: depreciation is the accountant's estimate of the equipment wearing out, and in this business the equipment really does wear out, on a schedule, in cash.

(e) The wrong decision (1 point)

The owner sees \$209,000 of EBITDA, subtracts \$148,000 of debt service in their head, decides there is roughly \$61,000 available, remembers that "net income was \$78,400," and takes \$90,000.

Actual cash available after debt service and required capital expenditure is \$16,000. The distribution overdraws the business by \$74,000**, and that \$74,000 does not come from profit — it comes from working capital**: the cash that was going to fund February. The restaurant will discover this in the week the annual insurance premium, a payroll, and rent arrive together, and it will discover it as a vendor conversation rather than as an accounting entry.

EBITDA is a valuation metric. It is not a spending metric, and it is emphatically not a distribution metric.

C7. Channel contribution, and the displacement question (8 points)

(a) Delivery labor per order (1 point)

  Wages       5 hours x $17.50            =   $87.50 / night
  Burden      $87.50 x 0.1215             =   $10.63
  ----------------------------------------------------------
  Total                                      $98.13 / night
  Per order   $98.13 / 22 orders           =    $4.46

That labor is unabsorbed — it exists only because the channel exists, it is scheduled whether 14 orders come in or 30, and it must be charged to the channel in full. An operator who leaves it inside "kitchen labor" will conclude the channel is more profitable than it is.

(b) Contribution per delivery order (2 points)

  Average order value                                        $52.00     100.0%
  less third-party commission     $52.00 x 0.27             -$14.04      27.0%
  less food cost                  $52.00 x 0.305            -$15.86      30.5%
  less packaging and disposables                             -$2.35       4.5%
  less unabsorbed delivery labor                             -$4.46       8.6%
  ------------------------------------------------------------------------------
  CONTRIBUTION PER DELIVERY ORDER                            $15.29      29.4%

(c) Contribution per dining-room cover (1 point)

  Average check                                              $44.00     100.0%
  less food cost                  $44.00 x 0.305            -$13.42      30.5%
  less card processing            $44.00 x 0.0281            -$1.24       2.8%
  less variable service labor     $44.00 x 0.12              -$5.28      12.0%
  ------------------------------------------------------------------------------
  CONTRIBUTION PER DINING-ROOM COVER                         $24.06      54.7%

A delivery order is 18% larger than a dining-room check and contributes \$8.77 less. The commission alone is worth more than eleven times the card processing it replaces.

(d) The naive annual number (1 point)

22 orders × 5 nights × 52 weeks = 5,720 orders 5,720 × \$15.29 = **\$87,458.80 of annual contribution**

This is the number the platform's dashboard effectively tells the operator, and it is the number most operators quote. It is wrong, because it assumes every order was free to produce.

(e) After displacement (2 points)

Split the volume:

• Off-peak: 14 × 5 × 52 = 3,640 orders, displacing nothing → 3,640 × \$15.29 = **\$55,655.60**
• Peak: 8 × 5 × 52 = 2,080 orders, each displacing one dining-room cover

Each peak order earns \$15.29 and costs the restaurant a \$24.06 cover:

  Net effect per peak order    $15.29 - $24.06        =  -$8.77
  Annual                       2,080 x -$8.77         = -$18,241.60

  Off-peak contribution                                 $55,655.60
  Peak orders, net of displacement                     -$18,241.60
  ------------------------------------------------------------------
  TRUE ANNUAL CHANNEL CONTRIBUTION                      $37,414.00
  (versus the naive $87,458.80)

The channel destroys \$18,241.60 a year in the ninety minutes when the kitchen has nothing to spare, and the naive calculation overstates the channel's worth by \$50,044.80 — which is exactly the contribution of the 2,080 dining-room covers it gave away.

(f) The decision, and one alternative (1 point)

The decision: switch the channel off from 7:00 to 8:30. It costs \$31,803.20 of delivery contribution (2,080 × \$15.29) and recovers \$50,044.80 of dining-room contribution — a net gain of \$18,241.60 — provided the dining-room demand actually exists to fill those seats. If it does not, you have simply turned off revenue. Test it for four weeks and count.

The alternative: a delivery-menu markup. At a 15% markup the order rises to \$59.80. Food cost does not change — it is the same plate:

  Order value                                    $59.80
  less commission     $59.80 x 0.27             -$16.15
  less food cost      (unchanged)               -$15.86
  less packaging                                 -$2.35
  less delivery labor                            -$4.46
  ------------------------------------------------------
  CONTRIBUTION PER ORDER                         $20.98    (was $15.29)

Contribution per order rises \$5.69, and the peak-order penalty narrows from −\$8.77 to −\$3.08. Total channel contribution becomes (3,640 × \$20.98) − (2,080 × \$3.08) = \$76,367.20 − \$6,406.40 = \$69,960.80. It does not eliminate displacement — a peak order still loses money — but it changes the size of the problem by more than thirty thousand dollars a year. Note the honest limit: guests can see both menus, and a markup that is too aggressive costs you the order and some goodwill with it.

Solutions — Section D

D1. The Belmont Room (13 points)

(a) Prime cost, both years (2 points)

• Year 4: \$1,014,064 ÷ \$1,400,000 = 72.4%
• Year 3: \$998,000 ÷ \$1,486,000 = 67.2%
• Change: +5.2 points

Year 3 was already in the distressed band. Year 4 is in the band where a business consumes itself.

(b) Dollars versus points (2 points)

Largest dollar move: labor, up \$22,580** (\$549,000 → \$571,580, +4.1%) — on revenue that fell \$86,000, or 5.8%. Labor dollars went up while sales went down**. That is the whole statement in one sentence.

The two lines that fell in dollars and rose in points:

Both are true because the denominator shrank faster than the numerator. Cost of goods sold fell 1.5% while sales fell 5.8%; other operating fell 4.4% while sales fell 5.8%. A cost that falls more slowly than sales rises as a percentage even though the operator is spending less money on it.

This is the most common misreading of a declining P&L, and it cuts both ways. The corollary is occupancy: rent rose only \$4,300 (a 3.1% escalation), but occupancy went from 9.3% to 10.2% of sales. You cannot fix that line by calling the landlord. It is a denominator problem, and the only instrument that touches it is revenue.

(c) What it shows (3 points — one per defensible reading)

1. The schedule was never cut to the volume. Revenue fell 5.8%; labor rose 4.1%. Had labor merely held its prior-year 36.9% of sales, it would have been \$516,600 — \$54,980 less than it was, which by itself turns a \$14,704 operating loss into a \$40,276 operating profit. (\$1,400,000 × 0.369 = \$516,600; \$571,580 − \$516,600 = \$54,980; \$54,980 − \$14,704 = \$40,276.)
2. Prime cost is the whole story, and it is 5.2 points of it. Holding prime at last year's 67.2% would have been \$940,800 rather than \$1,014,064 — \$73,264 of margin, which turns the loss into a \$58,560 profit. No other line on the statement is capable of that.
3. Beverage cost at 25.0% is three points heavy for a full bar, where 18–24% is the usual band. Three points on \$372,400 is about \$11,000 — small next to labor, but it is free money and it is the easiest count in the building.
4. The cash position is worse than the operating line suggests, and better than the net loss suggests. The \$105,104 net loss includes \$62,000 of non-cash depreciation, so operating cash burn is roughly \$43,104 before any principal repayment. Principal is not on this statement at all.

(Award the three points for any three of the above, or any equally specific and arithmetically supported reading.)

(d) What it does not show (4 points — grade this hardest; it is the part that distinguishes a reader from a calculator)

Full credit requires five items, each with a stated reason it matters. Strong answers include:

1. Cash, and the balance sheet behind it. There is no bank balance, no payables aging, no line-of- credit balance. A business burning \$43,104 of operating cash may be stretching produce vendors to sixty days, or may be fine on an owner's guarantee. The statement cannot distinguish "losing money slowly with a cushion" from "insolvent a week from Tuesday" — and those require opposite actions.
2. The shape of the year. One annual column hides which months lost money. A restaurant losing \$14,704 over twelve months may be earning \$60,000 in eight good months and losing \$75,000 in four bad ones — in which case the fix is a daypart or a season, not the whole business.
3. Covers versus average check. Revenue fell 5.8%; nothing says whether fewer people came or the same people spent less. Fewer covers is a demand problem — competition, reviews, marketing. A lower check is a menu, pricing, beverage-attachment, and service problem. The remedies do not overlap.
4. The composition of the food cost overrun. 34.0% of food sales, but why? Theft, over-portioning, waste and spoilage, uncosted specials, vendor increases never passed through to the menu, or menu drift. An annual P&L identifies the wound; it never identifies the weapon.
5. The labor split. \$571,580 with no front-of-house/back-of-house split, no fixed/variable split, no overtime figure, no headcount, no turnover rate. You cannot tell whether the increase is wage inflation, overtime caused by understaffing, an added manager, or a schedule nobody cut.
6. Whether owner compensation sits in the \$156,000 salary line. If the chef-owner takes nothing, the true economics are worse than shown. If they take \$90,000, a buyer would look at this differently.
7. The lease. Term remaining, escalation schedule, percentage-rent clause, personal guarantee, assignment rights. Occupancy at 10.2% and climbing is a structural fact this statement reports without explaining, and it determines whether an exit is even available.
8. Off-premise mix and channel economics. "Technology and delivery software \$14,900" is the only trace of a delivery channel. Commission has no line of its own; if the platform nets it out of deposits, revenue and margin are both being reported in a way this statement cannot reveal.
9. Deferred maintenance and coming capital expenditure. \$62,000 of depreciation asserts that assets are wearing out; repairs at \$31,200 suggest they are. Nothing says whether the walk-in has two years left or two months, and a compressor is a cash event, not a P&L event.
10. The guest. No covers, no average check, no frequency, no reservation data, no review trend. The largest single driver of next year's revenue does not appear anywhere on this page.
11. Comps, voids, and discounts, which are netted into revenue and invisible.
12. Whether sales tax and payroll withholding have actually been remitted. This is the failure mode that converts a bad business year into a personal liability that survives the business.

(e) What you do first (2 points)

Two things, in parallel, in the first week.

The first number: weekly prime cost. Count food and beverage inventory this Sunday night — yourself — and stand up a one-page weekly flash report carrying sales, covers, cost of goods sold from a real count, labor from payroll, and prime cost. You cannot manage a 72.4% prime cost against a statement that arrives three weeks after a month you can no longer change.

The co-equal first task: a thirteen-week cash forecast. Before optimizing anything, establish whether this business has ninety days. Everything else is contingent on that answer.

Defend it against the obvious alternatives:

• Not "cut labor" on day one. You do not yet know which labor. Cutting blind, in a restaurant whose reviews are already drifting, converts a cost problem into a revenue problem, and revenue problems are much harder to reverse.
• Not "raise prices." A 5.8% revenue decline of unknown composition may be a covers problem, and a price increase into a covers problem accelerates it.
• Not "renegotiate the rent." Occupancy is a denominator problem here, and the landlord holds the lease.
• Not "cut marketing." At \$16,800 it is 1.2% of sales — already the smallest plausible lever on the statement, and one of the few lines that could grow the denominator.

D2. Sparrow & Stone (12 points)

(a) The trough (2 points)

**Week 8, at \$10,400.** The next-lowest weeks are Week 12 (\$14,600) and Week 10 (\$15,100) — this is a single clear low point in late February, not a plateau.

(b) Peak-to-trough drawdown (2 points)

• Peak: Week 1, \$42,000
• Trough: Week 8, \$10,400
• Drawdown: \$31,600

That figure — not the ending balance, not the quarter's net of +\$1,200 — is the number that sizes the financing. Over thirteen weeks this business is very nearly cash-neutral. It is the path that would have closed it.

(c) Weeks below the minimum (2 points)

Six of thirteen weeks fall below the stated minimum. The worst miss is \$14,600, in Week 8.

(d) How much working capital, and in what form (3 points)

The number. To hold a \$25,000 floor through this quarter, the business needed to enter Week 1 with \$48,600** rather than \$34,000 — the \$14,600 shortfall added to what it had. Stated the other way: it needed to be able to fund a \$31,600 drawdown** while never dropping below \$25,000, which means \$56,600 of cash at the peak.

The form: a revolving line of credit of \$45,000 to \$50,000, arranged in the autumn. Defend it against the alternatives:

• Not a term loan. The need is seasonal, not permanent — the account recovers to \$35,200 by Week 13 unaided. Paying interest on \$50,000 for twelve months to solve a six-week problem is expensive, and it adds permanent debt service to a business whose problem is that its obligations already cluster badly.
• Not equity. You do not sell a piece of a profitable business to fund February.
• Not vendor stretching. It is an unpriced loan from people whose goodwill is an operating asset, and the day a produce vendor puts you on credit hold in the middle of a Friday is the day the savings disappear.
• Sizing. \$31,600 is the forecast drawdown. February can be worse than forecast — a snow week, a compressor, a health-department re-inspection. Size to roughly 1.5× the worst modeled drawdown, so \$45,000–\$50,000. A line that exactly matches the model is a line that fails the first time the model is wrong.

(e) Three things twelve weeks earlier (3 points — 1 per item, with at least one quantified)

1. Convert the annual insurance premium to monthly installments. \$14,800 in a single week becomes roughly \$1,250 a month. The Week 5 outflow falls by \$13,550, and because nothing between Weeks 5 and 8 reverses it, the trough rises from \$10,400 to \$23,950:

text Wk 5 $26,800 + $13,550 = $40,350 Wk 6 $31,150 Wk 7 $31,450 Wk 8 $23,950 <- new trough

One phone call in October, worth \$13,550 of February liquidity.

2. Arrange the line of credit in October, not in February. A bank underwrites the trailing quarter. In October the trailing quarter is autumn and the answer is yes; by Week 8 the trailing quarter is this one and the statements say "declining." The time to arrange credit is when you do not need it.

3. Pre-fund the known lumps. The workers' compensation true-up (\$5,400) and the liquor license renewal (\$3,900) total \$9,300 and were both knowable in October. Sweeping roughly \$775 a week into a separate account through the strong autumn weeks removes both from the trough entirely.

4. Schedule to the forecast. Receipts fall 23% from Week 1 to Week 7; payroll falls 10%. The Week 2 run was 32.9% of the two weeks it covered; the Week 6 run was 36.3%. Holding 32.9% through the trough window saves \$1,646 in Week 6 and \$1,808 in Week 8 — \$3,454, which lifts the trough to \$13,854 on its own.

5. Service the walk-in in October. The compressor failed in Week 11 as a \$6,800 emergency. A pre-season inspection converts an emergency in the worst month into a planned expense in a good one — or at least into a known one.

Items 1 and 4 together lift the trough to \$27,404**, above the \$25,000 floor, without borrowing a dollar**. That is the point of the whole exercise: most restaurant cash crises are not financing problems. They are calendar problems that were solvable in the autumn and became financing problems in February.

Solutions — Section E (grading guides, 15 points each)

Students answer two. Grade each out of 15: 6 points for correct and specific use of the material, 5 points for the quality of the argument and the numbers carrying it, 4 points for honesty about limits, costs, and what the position gives up. An answer that never names a cost cannot exceed 11.

E1 grading guide — the covenant that cannot see February

There is no single right answer here, and the item should be graded that way. The question is not which covenant is correct. It is whether the student understands why this one failed and can propose something that would have caught a February cash trough.

The insight the whole item turns on. The covenant is not too loose. It is the wrong instrument, correctly applied. A 1.25× DSCR tested annually measures earnings over a year. The risk that actually threatens this business is cash in a week. Those are different quantities on different clocks, and no adjustment to the level of an annual earnings test can convert one into the other.

The arithmetic the student should reproduce or reason from:

Nothing trips it — including the scenario the lender's own analyst wrote down as the likely miss. And the operating account still goes negative in the week of February 19.

Full credit (13–15) contains all four of these:

1. The diagnosis stated as a mismatch of unit and frequency — annual versus weekly, earnings versus cash — not merely "the covenant was too easy."
2. A specific, implementable alternative, with a threshold and a test frequency, that the borrower could actually compute. Any of the following is fully defensible: - a minimum-liquidity covenant — maintain, say, \$40,000 of unrestricted cash plus unused line availability, tested monthly; - a springing covenant — no ongoing test until unrestricted cash falls below a trigger (say \$25,000), at which point monthly reporting and a distribution block spring into effect; - a DSCR tested quarterly on a trailing-twelve-month basis paired with a cash test, with the student acknowledging that the trailing-twelve part still cannot see a single week; - a reporting covenant — a rolling thirteen-week cash forecast delivered monthly with actual-versus-forecast variance; - a distribution blocker tied to a cash floor, which is the cheapest instrument on the list; - releasing the \$40,000 controlled reserve against weeks-of-cash-on-hand rather than against construction milestones.
3. A demonstration that the proposal would actually have caught the week of February 19. This is the graded core. "Monthly liquidity test at \$40,000" catches it because the account is measured in February and fails in February. "Quarterly DSCR" does not, unless paired with a cash measure.
4. An honest accounting of what it costs the borrower. Every one of these has a price, and the student must name it: - A liquidity covenant sterilizes working capital. Requiring \$40,000 held unrestricted means \$40,000 the operator cannot deploy — and in this deal the reserve *is* \$40,000, so the covenant and the reserve are the same money, which the borrower should notice. - A quarterly earnings test on quarterly results would trip every Q1 for every seasonal restaurant in the portfolio. Bellwether's own plan runs 66.6% prime cost on \$363,100 in Q1. That converts a normal winter into a technical default and hands the lender a hair trigger over a sound business. - A reporting covenant costs administrative burden — perhaps \$400 to \$800 a month of bookkeeper time in a business with no controller — and it costs the owner the ability to be vague. - Any covenant creates technical-default risk, and a technical default is not a small thing: it can accelerate the note, trigger the personal guarantees, and give the lender control of a business that is fundamentally fine.

Half credit (7–10) typically misses one of two things: the cost side entirely (proposing a covenant as though it were free), or specificity (arguing eloquently that the covenant is wrong without proposing anything a loan officer could write into a document and test).

The most common wrong turn: asserting a higher annual DSCR. Grade this down and say why in the margin. It fails for a reason the scenario table makes arithmetically plain:

• The combined downside still clears at 2.23×. A 2.00× covenant catches nothing.
• To trip on the plan itself you would need a covenant above 3.76×, which would decline a loan the lender has just decided is sound — and would decline most healthy independent restaurants.
• And even a covenant set at 3.75× would still be an annual test on a full-year number. A business can clear any annual earnings test and be empty in week eight. Raising the level changes how many businesses you decline. It does not change what the instrument can see.

A second wrong turn worth flagging: proposing a covenant the borrower cannot cheaply produce — audited quarterly financials from a single-unit restaurant, say. A covenant that is expensive to measure will not be measured, and an unmeasured covenant protects nobody.

A strong answer often notices that the credit memo already contained the answer. The analyst wrote down that the labor line was optimistic by about three points — and then tested that worry with an instrument incapable of registering it. The information was in the file. The instrument was wrong.

E2 grading guide — wage and hour, traced to the operating statement

Full credit (13–15) contains:

• What the FLSA test actually turns on: duties and the salary basis and threshold — not the job title, and not the fact that someone is paid a salary. For an executive exemption the primary duty must be management, the employee must customarily direct the work of two or more others, and their recommendations on hiring and firing must carry particular weight. Two supervisors who cook the line for the overwhelming majority of the shift and exercise no independent judgment over others are unlikely to qualify, whatever the salary.
• Exposure beyond back wages: back overtime (commonly a two-year lookback, extended for willful violations), potential liquidated damages that can double it, attorney fees, state-law claims that may reach further back and be broader, and the fact that one claim generally surfaces everyone in the role — both supervisors and their predecessors.
• The quantification. With the salary treated as covering 40 hours, the implied regular rate is \$52,000 ÷ 52 ÷ 40 = **\$25.00 an hour**:

text Lawful weekly pay at 54 hours Regular 40 x $25.00 = $1,000.00 Overtime 14 x $37.50 = $525.00 --------- $1,525.00 / week Annual $1,525.00 x 52 = $79,300.00 each Increase $79,300 - $52,000 = $27,300.00 each Two positions = $54,600.00 Burden $54,600 x 0.1215 = $6,633.90 ----------- TOTAL INCREASE IN THE LABOR LINE $61,233.90

On \$2,400,000 of sales that is 2.55 points of labor, and therefore 2.55 points of prime cost. A student who computes this and stops has done most of the work; a student who then observes that the restaurant's published prime cost has been understated by 2.55 points for as long as the error ran — so the break-even, the margin of safety, and every plan built on them were wrong — has understood the item. - Back-wage exposure: two people × \$27,300 × two years = **\$109,200, before liquidated damages (potentially \$218,400) and before fees. - What to do, and when. Reclassify. Then manage the consequence: bringing the schedule to 45 hours costs 40 × \$25.00 + 5 × \$37.50 = \$1,187.50 a week, \$61,750 a year, an increase of \$9,750 each — \$19,500 for two, plus \$2,369.25 of burden, \$21,869.25 total, or 0.91 points. Or restructure the roles so the exemption is genuine and raise the salary accordingly. Or hire a cook to absorb the hours, which may cost less than the overtime premium and is better for the kitchen. - Why the cheapest moment is before someone else finds it: self-correction stops the clock on accruing exposure and converts a claim with liquidated damages and fees into back wages paid voluntarily. - Jurisdiction.** State duties tests and salary thresholds can be stricter than federal, some states impose daily overtime, and the analysis changes accordingly. Say so, and say to use counsel.

Half credit (7–10) typically misses: the traced effect on prime cost and break-even (treating this as a legal question rather than an operating one), or the fact that the exposure is not limited to the unpaid overtime.

Most common wrong turn: recommending a fix that is not lawful — "have them clock out at 40," "pay a bonus instead of overtime," "reclassify going forward and say nothing about the past." Any answer proposing off-the-clock work or a scheme to avoid the overtime obligation should lose the honesty points outright and be marked. The book's position is unambiguous: the compliance and prevention side, always.

E3 grading guide — grow or consolidate

Full credit (13–15) contains:

• Owner dependency measured, not felt. The student must name what they would measure. Strong candidates: how many tasks only the owner can perform (schedule, ordering, closing the books, expo on Friday and Saturday, the vendor relationships); days off taken in the last ninety; the longest consecutive period the restaurant held its 58% prime cost with the owner absent; whether a written system exists for each of scheduling, ordering and pars, the weekly count, the flash report, and training; and whether anyone else in the building can read a P&L and act on it.
• A threshold that would change the answer — stated in advance, which is what makes it a criterion rather than a rationalization. For example: unit one holds 58% prime cost and its sales for two consecutive months while the owner is physically absent at least four days a week, and the weekly flash report is produced by someone else.
• What happens to unit one. The owner's attention is unit one's most valuable uncosted input, and a second opening removes it for six to nine months. Two points of prime-cost drift at unit one on \$1.9 million is \$38,000 — which can exceed the second unit's entire first-year contribution. This is the argument that most students miss and it is the strongest one available.
• What it does to cash even when profit is fine. A second unit consumes cash long before it produces any: build-out, pre-opening payroll and training, initial inventory, licensing, and a working-capital reserve that must be real and separate from the construction contingency. A business with \$240,000 of operating profit and a cushion becomes a business with two rents, two payrolls, and a construction loan — and the enterprise break-even moves up by the whole second fixed base divided by the contribution margin ratio.
• The general-manager problem, stated honestly: you must hire the person who replaces you at unit one before you need them, and carry them out of unit one's profit for six months, which is the real price of the second unit and rarely appears in the projection.

Half credit (7–10) typically: treats owner dependency as a personality trait rather than a measurable condition; argues from ambition or from the attractiveness of the offered terms rather than from unit one's readiness; or ignores cash entirely and reasons only from profit.

Most common wrong turn: "The second unit will let the owner step back and work on the business." It does the opposite. A second unit adds work before it adds capacity, and the capacity it eventually adds has to be hired and paid for out of unit one first. Either direction of the final recommendation can earn full marks — this is a genuinely two-sided question — but only if the criteria come before the conclusion.

E4 grading guide — recoverable or not

Full credit (13–15) sorts the problems honestly and sequences the response by the binding constraint.

Recoverable by operating differently:

• Prime cost at 69% — nine points above the full-service benchmark. This is the one line that moves in weeks: count inventory this Sunday, compute the ideal-versus-actual variance, cut the schedule to a forecast, re-cost the menu. Three to four points is realistic within a quarter, and the student should say which points and how.
• Drifting reviews — recoverable, but slowly. A quarter or two before the trend turns, which is longer than the cash allows and must be planned around rather than relied on.
• The exhausted owner — partially recoverable. It is a delegation and staffing problem with a price tag, and the price tag competes with the cash constraint.

Structural, and not fixable from inside the four walls:

• Occupancy at 11% with six years and two escalations remaining. The landlord holds the lease and probably a personal guarantee. This line is only touchable through the denominator — more sales — or through an exit, assignment, or sublease. Say what it forecloses: it makes the business a poor candidate for a slow turnaround, because the fixed base is scheduled to grow.
• The competitor four blocks away. Permanent. It changes the market's capacity, not the restaurant's execution.
• Nine days of cash. This is the binding constraint, and naming it as such is worth a large share of the credit. It forecloses every remedy whose payoff arrives in more than about six weeks — which is most of them.

Sequencing (full credit requires it in this order): cash first — a thirteen-week forecast this week, because nothing else is decidable without it; prime cost second — count, then cut the schedule to the forecast; revenue third, because it is the slowest and most expensive lever.

The date. Full credit states a decision point tied to a number rather than to a feeling. For example: if the thirteen-week forecast shows the account below one payroll run at any point in the next eight weeks, and prime cost has not moved three points within four weeks of the flash report going live, the answer is an orderly exit. Deciding the criterion before the emotion arrives is the whole discipline.

The honest exit, defended. An operator who exits with vendors paid, staff given notice and references, sales tax and payroll withholding current, and the lease assigned rather than abandoned keeps the thing that lets them work in this industry again. An operator who runs the account to zero converts a business failure into a personal one — and unremitted trust-fund taxes follow a person past the closing of the doors. Saying this plainly is the mark of a strong answer.

Half credit (7–10) typically: refuses to name anything unrecoverable and produces a list of improvements with no constraint; or recommends an exit without a diagnostic, which is a mood rather than an analysis; or offers "work harder" as a plan.

Most common wrong turn: proposing a marketing push as the first move. At 69% prime cost, an incremental dollar of sales contributes about thirty-one cents, so the covers required to outrun the burn are implausible — and the marketing spend is cash out this week against revenue that arrives in six, from a business with nine days of it. It is the correct instinct applied at the wrong point in the sequence, and the student should be shown exactly where in the sequence it belongs.

End of examination.