Chapter 6, Problem 6.3AP

Determine break-even sales under alternative sales strategies and evaluate results.

(LO 2), AN

The Grand Inn is a restaurant in Flagstaff. Arizona. It specializes in southwestern style meals in a moderate price range. Paul Weld, the manager of Grand, has determined that during the last 2 years the sales mix and contribution margin ratio of its offerings are as follows.

	Percent of    Total Sales	Contribution Margin Ratio
Appetizers	15%	50%
Main entrees	50%	25%
Desserts	10%	50%
Beverages	25%	80%

Paul 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 $117.000. The company has fixed costs of $1,053,000 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.

(a) Total sales $2,600,000

(b) Total sales $3,375,000

(b) Paul 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 $585.000. At the same time, he is proposing to change the sales mix to the following.

	Percent of Total Sales	Contribution Margin Ratio
Appetizers	25%	50%
Main entrees	25%	10%
Desserts	10%	50%
Beverages	40%	80%

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 Paul 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.