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.
Want to see the full answer?
Check out a sample textbook solutionChapter 6 Solutions
Managerial Accounting: Tools for Business Decision Making
- Mary's Kitchen sells three types of soups: tomato basil, cheddar dill, and loaded potato. The following table shows the sales price and variable cost for each type. Mary incurs $160,000 a year in fixed costs. Assume that the restaurant has a sales mix of two tomato basil servings, two cheddar dill servings and one loaded potato serving. Type Tomato basil Cheddar dill Loaded potato (b) Show Transcribed Text Tomato basil Sales Price Cheddar dill $2.00 4.00 Loaded potato 4.00 $ $ Variable Cost $ $1.00 What amount of revenue would need to be generated by each type of soup for the company to earn $20,000 in operating income? (Round answers to O decimal places, e.g. 25,000.) 2.00 2.00 Contribution Margin $1.00 2.00 2.00arrow_forwardSub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station’s business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub’s business strategy is to sell the lowest cost sub on the planet. Sub Station Planet Sub Net sales 109,649 63,471 Net income 27,322 4,892 Total assets, beginning 76,583 41,199 Total assets, ending 119,171 47,333 Required: 1. Calculate Sub Station’s return on assets, profit margin, and asset turnover ratio. 2. Calculate Planet Sub's return on assets, profit margin, and asset turnover ratio. 3-a. Which company has the higher profit margin? Sub Station’s Planet Sub 3-b. Which company has the higher asset turnover? Sub Station’s Planet Sub 3-c. Are the two ratios consistent with the primary business strategies of the two companies? Yes Noarrow_forwardZoom kitchen, a chain of four restaurants in the Chicago area, is known for serving sizable portions of meat and potatoes. During the past four years salad sales have increased from 18% of its sales mix to 40%. This hass pleased company management because the contribution margin on salads is much higher than on meat. Why do you suppose restaurants are so eager to sell beverages and desserts?arrow_forward
- Required information [The following information applies to the questions displayed below] Sub Station and Planet Sub reported the following selected financial data (5 in thousands). Sub Station's business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub's business strategy is to sell the lowest cost sub on the planet. Net sales Net Income Total assets, beginning Total assets, ending Choose Numerator Choose Numerator Sub Station Planet Sub $63,171 4,532 43,599 2. Calculate Planet Sub's return on assets, profit margin, and asset turnover ratio. (Enter your answers in thousands of dollars. (L.e. 123,000 should be entered as 123)) Choose Numerator $109,345 23,022 76,283 118,571 Return on Assets Choose Denominator Profit Margin Choose Denominator Asset Turnover Choose Desominator Return on Assets Return on assets Profil Margis Asset Turnover Asset Tunaver 0 4arrow_forwardA restaurant has three main products: drinks, meals and desserts. Fixed costs are $397,000. Other financial information is as follows: Item drinks: meals desserts Average Purchase (in S) 10 25 10 Average Margin Total Sales Dollars (in %) 40 50 10 60% 20% 70% What are total sales (in dollars) needed to make a profit of $200,000, assuming that the sales mix remains constant? How many drinks would they need to sell in order to make a profit of $200,000, assuming that the sales mix remains constant.arrow_forward! Required information [The following information applies to the questions displayed below.] Sub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station's business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub's business strategy is to sell the lowest cost sub on the planet. Net sales Net income Total assets, beginning Total assets, ending Choose Numerator 2. Calculate Planet Sub's return on assets, profit margin, and asset turnover ratio. (Enter your answers in thousands of dollars. (i.e. 123,000 should be entered as 123).) Choose Numerator Choose Numerator ÷ = 16 ÷ + .. ÷ + Sub Station $109,049 26,722 75,983 117,971 4 Planet Sub $62,871 4,292 39,999 46,133 Return on Assets Choose Denominator Profit Margin Choose Denominator Asset Turnover Choose Denominator | 11 || Return on Assets Return on assets Profit Margin Profit Margin Asset Turnover Asset Turnover 0 times e 0arrow_forward
- Sub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station’s business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub’s business strategy is to sell the lowest cost sub on the planet. Sub Station Planet Sub Net sales $ 109,349 $ 63,171 Net income 27,022 4,592 Total assets, beginning 76,283 40,599 Total assets, ending 118,571 46,733 2. Calculate Planet Sub's return on assets, profit margin, and asset turnover ratio. (Enter your answers in thousands of dollars. (i.e. 123,000 should be entered as 123).) Return on Assets Choose Numerator ÷ Choose Denominator = Return on Assets ÷ = Return on assets ÷ = Profit Margin Choose Numerator ÷ Choose Denominator = Profit Margin ÷ = Profit Margin ÷ = Asset Turnover Choose Numerator ÷ Choose Denominator = Asset Turnover ÷ =…arrow_forwardSub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station’s business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub’s business strategy is to sell the lowest cost sub on the planet. Sub Station Planet Sub Net sales $ 109,349 $ 63,171 Net income 27,022 4,592 Total assets, beginning 76,283 40,599 Total assets, ending 118,571 46,733 Required: 1. Calculate Sub Station’s return on assets, profit margin, and asset turnover ratio. (Enter your answers in thousands of dollars. (i.e. 123,000 should be entered as 123).) Return on Assets Choose Numerator ÷ Choose Denominator = Return on Assets ÷ = Return on assets ÷ = Profit Margin Choose Numerator ÷ Choose Denominator = Profit Margin ÷ = Profit Margin ÷ = Asset Turnover Choose Numerator ÷ Choose Denominator = Asset Turnover…arrow_forwardSub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station’s business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub’s business strategy is to sell the lowest cost sub on the planet. Sub Station Planet Sub Net sales $ 110,149 $ 63,971 Net income 27,822 5,392 Total assets, beginning 77,083 42,199 Total assets, ending 120,171 48,333 2. Calculate Planet Sub's return on assets, profit margin, and asset turnover ratio. (Enter your answers in thousands of dollars. (i.e. 123,000 should be entered as 123).)arrow_forward
- Sub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station’s business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub’s business strategy is to sell the lowest cost sub on the planet. Sub Station Planet Sub Net sales $ 109,349 $ 63,171 Net income 27,022 4,592 Total assets, beginning 76,283 40,599 Total assets, ending 118,571 46,733 3-a. Which company has the higher profit margin? multiple choice 1 Sub Station’s Planet Sub 3-b. Which company has the higher asset turnover? multiple choice 2 Sub Station’s Planet Sub 3-c. Are the two ratios consistent with the primary business strategies of the two companies? multiple choice 3 Yes Noarrow_forwardSub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station’s business strategy is to sell the best-tasting sandwich with the highestquality ingredients. Planet Sub’s business strategy is to sell the lowest-cost sub on the planet. Sub Station Planet SubNet sales $ 108,249 $ 62,071Net income 25,922 3,492Total assets, beginning 75,183 38,599Total assets, ending 116,371 44,533Required:1. Calculate Sub Station’s return on assets, profit margin, and asset turnover ratio.2. Calculate Planet Sub’s return on assets, profit margin, and asset turnover ratio.3. Which company has the higher profit margin and which company has the higher asset turnover? Is this consistent with the primary business strategies of these two companies?arrow_forwardSub Station and Planet Sub reported the following selected financial data. Sub Station's business strategy is to sell the best-tasting sandwich with the highest-quality ingredients. Planet Sub's business strategy is to sell the lowest-cost sub on the planet. Sub Station Net sales Net income Total assets, beginning Total assets, ending Required: Planet Sub $110,149 $63,971 27,822 5,392 77,083 42,199 120,171 48,333 1. Calculate Sub Station's return on assets, profit margin, and asset turnover ratio. 2. Calculate Planet Sub's return on assets, profit margin, and asset turnover ratio. 3-a. Which company has the more favorable profit margin? 3-b. Which company has the more favorable asset turnover? 3-c. Are the two ratios consistent with the primary business strategies of the two companies? Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3A Req 3B Req 3C Calculate Sub Station's return on assets, profit margin, and asset turnover ratio. Choose Numerator…arrow_forward
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning