In this chapter we discussed the relationship of cost behaviors to firm profitability. For this discussion question we ask you to apply what you learned from this week’s lesson to our rea
In this chapter we discussed the relationship of cost behaviors to firm profitability. For this discussion question we ask you to apply what you learned from this week’s lesson to our real company, Chipotle Mexican Grill. You will find attached a spreadsheet that has three smaller spreadsheets. The spreadsheet is attached here Information Spreadsheet for Week 2 Discussion.xlsx
The first spreadsheet is the historical income statement numbers for Chipotle for the past ten years. We pulled these from the original 10K’s or annual reports. In practice there are many databases that pull this same information. Looking at this first spreadsheet you will see that Chipotle was increasing sales at high teens low twenty percent rate until 2016. In that year, the company had several food-borne virus mishaps that zapped their sales in 2016. Since that time, they were rebuilding until the Covid outbreak in 2020 slowed their sales. In 2021, Chipotle bounced back with the highest increase in sales since 2014. All the numbers in the first spreadsheet lists the income statement items in (000)’s of dollars.
The second spreadsheet shows each income statement item as a percentage of that year’s revenue. For example, in 2021 sales were $7.5 billion and food, beverage, and packaging was $2.3 billion. When you take 2.3 billion divided by 7.5 billion you get 31%. This corresponds with the 31% shown in the second spreadsheet as the percentage that food, beverage, and packaging expense for 2021 represents as a percentage of 2021 revenue for Chipotle. Practicing managers use this type of spreadsheet to get a feel for the nature of cost. Costs that hold to a constant percentage of sales like food, beverage, and packaging at between 31% to 35% indicate that these expenses are variable. The fact that they maintained a 33% relationship for four out of the past ten years indicates that Chipotle does a good job of managing these costs or passing increases in these costs along to the customer.
The third spreadsheet represents the growth in the income statement item from the prior year. For example, sales grew from $6.0 billion in 2020 to $7.5 billion in 2021. To calculate the rate or growth you take the ending number 7.5 divided by the beginning number of 6.0 to get 1.26. You then subtract one to get the .26 which translates to 26 percent growth in sales from 2020 to 2021. Practicing managers use this type of spreadsheet to see in cost are growing quicker or more slowly than sales. If costs are growing at a higher percentage that the increase in sales this can eat into your profit margin over time. If sales are decreasing of flat and the cost item is increasing this could indicate a fixed cost where you may have capacity or cost lagging problems (in this case too much capacity or a cost that is difficult to decrease).
Discussion Question – Please comment on the consistency and levels of Chipotle’s profitability over the 10-year period.
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