Chapter 20: Q28E (page 1126)

Owner Shan Mu is considering franchising her Noodles by Murestaurant concept. She believes people will pay $10.00 for a large bowl ofnoodles. Variable costs are $5.00 per bowl. Mu estimates monthly fixed costsfor a franchise at $9,000.
Requirements
1. Use the contribution margin ratio approach to find a franchise’s breakevensales in dollars.
2. Mu believes most locations could generate $61,500 in monthly sales. Isfranchising a good idea for Mu if franchisees want a minimum monthlyoperating income of $21,000? Explain your answer.

Short Answer

Expert verified

Answer

1. Breakeven sales is $18,000

2. Franchising is a good idea, as sales are higher than breakeven sales.

Step by step solution

Calculation of contribution margin and contribution margin ratio

	$
Sales price per bowl	10
Variable cost per bowl	(5)
Contribution margin per bowl	5
Contribution margin ratio (contribution margin per bowl/ sales price per unit x100)	50%

Calculation of breakeven sales in dollars

$B r e a k e v e n s a l e s i n d o l l a r s = \frac{F i x e d c o s t}{C o n t r i b u t i o n m a r g i n r a t i o} = \frac{$ 9, 000}{50 %} = $ 18, 000$

Profitability analysis

$R e q u i r e d s a l e s i n d o l l a r s = \frac{f i x e d \cos t + t a r g e t p r o f i t}{C o n t r i b u t i o n m a r g i n r a t i o} = \frac{$ 9, 000 + $ 21, 000}{50 %} = $ 60, 000$