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QUESTION:

Before franchising her happy noodles restaurant concept, owner Sung Chi had made the following assumptions

Chi
believed people would pay
$ 5.00
for a large bowl of noodles. Variable costs would be
$ 2.00

a bowl creating a contribution margin of $ 3.00 per bowl. Sung Chi estimated monthly fixed costs for franchisees at $ 8 comma 400. 


Franchisees wanted a minimum monthly operating income of
$ 6 comma 000.

Chi did franchise her restaurant concept. Because of Happy Noodles's success. Noodles - n - More has come on the scene as a competitor. To maintain its market share, Happy Noodles will have to lower its sales price to $4.50 per bowl. At the same time, Happy Noodles hopes to increase each restaurant's volume to 8,000 bowls per month by embarking on a marketing campaign. Each franchise will have to contribute $500 per month to cover the advertising costs. Prior to these changes, most locations were selling 7,500 bowls per month.





ANSWER:

Requirement 1. What was the average​ restaurant's operating income before these​ changes?
Identify the formula labels and compute the operating income before the changes.
Contribution margin per unit
$3.00
Times:
Average sales volume units
7,500
Contribution margin
$22,500
Less:
Fixed expenses
8,400
Operating income
$14,100
Part 2
Requirement 2. Assuming that the price cut and advertising campaign are successful at increasing volume to the projected​ level, will the franchisees still earn their target profit of
$ 6 comma 000
per​ month? Show your calculations.
Identify the formula labels and compute the operating income after the changes.
New contribution margin per unit
$2.50
Times:
New sales volume units
8,000
Contribution margin
$20,000
Less:
New fixed expenses
8,900
Operating income
$11,100
Part 3

Cutting the sales price and advertising
allow the franchise owners to earn their target profits of
$ 6 comma 000
per month.

Posted by Cleveland on September 29, 2024
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