Response to the following problem:
Happy Wok fast-food restaurant has been doing such great business that owner Shan Lo is considering franchising her restaurant concept. She believes that customers across the country will happily pay $5 for a large bowl of noodles, veggies, and meat. Variable costs are $1.50 a bowl. Lo estimates that monthly fixed cost for franchisees would be $8,400.
Required:
1. Use the contribution margin ratio approach to compute a franchisee's breakeven sales in dollars.
2. Is franchising a good idea for Lo if franchisees will want a minimum monthly operating income of $8,750, but Lo does not believe most locations could generate more than $25,000 in monthly sales?