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Hillside Inn 15%

Price: $2.50


The Hillside Inn is a restaurant in Flagstaff, Arizona. It specializes in southwestern
style meals in a moderate price range. Phil Weld, the manager of Hillside, 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% 50%
Main entrees  50% 25%
Desserts  10% 50%
Beverages  25% 80%



Phil 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 $117,000. The company has fixed costs of
$1,053,000 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) Phil 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. He envisions an expansion of the restaurant that would increase
fixed costs by $585,000. At the same time, he is proposing to change the sales
mix to the following.

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