Refer to Noodle Time in E7-23A. Wong did franchise her restaurant concept. Because of Noodle Time's success, Noodles 'n More has come on the scene as a competitor. To maintain its market share, Noodle Time will have to lower its sales price to $6.00 per bowl. At the same time, Noodle Time hopes to increase each restaurant's volume to 6,000 bowls per month by embarking on a marketing campaign. Each franchise will have to contribute $500 per month to cover the advertising costs. Prior to these changes, most locations were selling 5,500 bowls per month.
In E7-23A
Owner Yang Wong is considering franchising her Noodle Time restaurant concept. She believes people will pay $6.50 for a large bowl of noodles. Variable costs are $1.95 a bowl. Wong estimates monthly fixed costs for franchisees at $8,400.
Requirements
1. What was the average restaurant's operating income before these changes?
2. Assuming that the price cut and advertising campaign are successful at increasing volume to the projected level, will the franchisees still earn their target profit of $7,000 per month? Show your calculations.