Assignment
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 two years the sales mix and contribution margin ratio of its offerings are as follows.
|
|
Percent 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.
|
|
Percent 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.