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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鈥檚 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

01

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%
02

Calculation of breakeven sales in dollars

Breakevensalesindollars=FixedcostContributionmarginratio=$9,00050%=$18,000

03

Profitability analysis

Requiredsalesindollars=fixedcost+targetprofitContributionmarginratio=$9,000+$21,00050%=$60,000

Yes, franchising is a good idea because Mu is expecting a monthly sales of $61,500 and company鈥檚 breakeven point is $60,000.

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Most popular questions from this chapter

Using the high-low method

Mark owns a machine shop. In reviewing the shop鈥檚 utility bills for the past 12 months, he found that the highest bill of \(2,600 occurred in August when the machines worked 1,200 machine hours. The lowest utility bill of \)2,300 occurred in December when the machines worked 600 machine hours.

Requirements

1. Use the high-low method to calculate the variable cost per machine hour and the total fixed utility cost.

2. Show the equation for determining the total utility cost for the machine shop.

3. If Mark anticipates using 800 machine hours in January, predict the shop鈥檚 total utility bill using the equation from Requirement 2.

Question: Computing contribution margin in total, per unit, and as a ratio

Complete the table below for contribution margin per unit, total contribution margin, and contribution margin ratio:

A B C Number of units 1,720 units 14,920 units 4,620 units

Sales price per unit \( 1,800 \) 4,500 $ 5,550

Variable costs per unit 720 3,600 1,665

Calculate: 鈥冣�冣�� 鈥� 鈥冣�冣�� 鈥冣�冣�� 鈥� 鈥�

Contribution margin per unit 鈥冣�冣�� 鈥冣�冣�� 鈥� 鈥冣�冣�� 鈥冣�冣�� 鈥� 鈥�

Total contribution margin 鈥冣�冣�� 鈥冣�冣�� 鈥� 鈥冣�冣�� 鈥� 鈥冣�冣�� 鈥� 鈥�

Contribution margin ratio

A furniture manufacturer specializes in wood tables. The tables sell for \(100 per unit and incur \)40 per unit in variable costs. The company has \(6,000 in fixed costs per month. Calculate the breakeven point in units under each independent scenario.

14. Variable costs increase by \)10 per unit.

15. Fixed costs decrease by $600.

16. Sales price increases by 10%.

Calculating breakeven sales and sales to earn a target profit;preparing a contribution margin income statement

Famous Productions performs London shows. The average show sells 1,000 ticketsat \(60 per ticket. There are 175 shows a year. No additional shows can be held as thetheater is also used by other production companies. The average show has a cast of60, each earning a net average of \)320 per show. The cast is paid after each show. Theother variable cost is a program-printing cost of \(8 per guest. Annual fixed costs total\)459,200.

Requirements

1. Compute revenue and variable costs for each show.

2. Use the equation approach to compute the number of shows Famous Productionsmust perform each year to break even.

3. Use the contribution margin ratio approach to compute the number of showsneeded each year to earn a profit of $4,264,000. Is this profit goal realistic? Giveyour reasoning.

4. Prepare Famous Productions鈥檚 contribution margin income statement for 175shows performed in 2018. Report only two categories of costs: variable andfixed.

The budgets of four companies yield the following information:

Company

Blue Red Green Yellow

Net Sales Revenue \( 1,900,000 \) (d) \( 1,500,000 \) (j) Variable Costs (a) 47,250 1,050,000 256,200 Fixed Costs (b) 168,000 159,000 (k) Operating Income (Loss) 298,500 (e) (g) 97,800

Units Sold 190,000 9,000 (h) (l) Contribution Margin per Unit \( 3.00 \) (f) \( 75.00 \) 18.00

Contribution Margin Ratio (c) 80% (i) 30%

Requirements

1. Fill in the blanks for each missing value. (Round the contribution margin per unit to the nearest cent.)

2. Which company has the lowest breakeven point in sales dollars?

3. What causes the low breakeven point?

See all solutions

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