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DeKalb 176000

Price: $2.50


The Eatery is a restaurant in DeKalb, Illinois. It specializes in deluxe sandwiches
in a moderate price range. Michael Raye, the manager of The Eatery, has determined that
during the last 2 years the sales mix and contribution margin ratio of its offerings are as
follows.

  % of Total Sales Contribution Margin Ratio
Appetizers  15% 60%
Main entrees  60% 25%
Desserts  10% 40%
Beverages  15% 80%


Michael is considering a variety of options to try to improve the profitability of the restaurant.
His goal is to generate a target net income of $176,000. The company has fixed costs
of $352,000 per year.

Instructions
(a) Calculate the total restaurant sales and the sales of each product line that would be
necessary to achieve the desired target net income.

(b) Michael believes the restaurant could greatly improve its profitability by reducing the
complexity and selling price of its entrees to increase the number of clients that it
serves. It would then more heavily market its appetizers and beverages. He is proposing
to reduce the contribution margin ratio on the main entrees to 10% by dropping the
average selling price and increasing the contribution margin ratio on desserts to 50% by
reducing costs. He envisions an expansion of the restaurant that would increase fixed
costs by 50%. At the same time, he is proposing to change the sales mix to the following.

  % of Total Sales Contribution Margin Ratio
Appetizers  25% 60%
Main entrees  40% 10%
Desserts  10% 50%
Beverages  25% 80%

Compute the total restaurant sales, and the sales of each product line that would be
necessary to achieve the desired target net income.

(c) Suppose that Michael reduces the selling price on entrees and increases fixed costs as
proposed in part (b), but customers are not swayed by the marketing efforts and the
sales mix remains what it was in part (a). Compute the total restaurant sales and the
sales of each product line that would be necessary to achieve the desired target net
income. Comment on the potential risks and benefits of this strategy.

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