Cross Country, a local restaurant is experiencing a declining gross profit margin (GP) due to an increase
Question:
Cross Country, a local restaurant is experiencing a declining gross profit margin (GP) due to an increase in the cost of meat by 10%. Meat (bacon and sausage) is ½ of the direct variable costs of producing a meal, that is, $1.50 of the total variable costs of $3.00. The current price for the breakfast is $5.99 and includes two eggs, two strips of bacon or sausage, toast, and country potatoes. In order to offset the decline, a price increase is being considered. The owner, Jay, wants GP to be restored, and therefore wants to increase prices to cover the decline. His friend, a marketer, argues that a price increase is very likely to decrease his current patronage of 500 a week, and therefore total revenue, as elasticity of demand is high for restaurant meals. Jay's friend/marketer suggests that there are other options to solve the GP problem, especially since the primary competition three miles away only charges $5.99 with coffee included.
Where do you stand? With the owner and increased prices or with his friend/marketer to look for alternatives? Argue your position.
Management Accounting
ISBN: 978-0132570848
6th Canadian edition
Authors: Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu