The Huskie Inn is a restaurant in DeKalb, Illinois. It specializes in deluxe sandwhiches in a moderate
Question:
Josh 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 $120,000. The company has fixed costs of $300,000 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) Josh 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. He envisions an expansion of the restaurant that would increase fixed costs by 40%. At the same time, he is proposing to change the sales mix to the following.
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 Josh 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.
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes...
Step by Step Answer:
Managerial Accounting Tools for business decision making
ISBN: 978-0470477144
5th edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso