Question

Owner Shan Lois considering franchising her Noodles for a restaurant concept. She believes people will pay $ 10.50 for a large bowl of noodles. Variable costs are $ 6.30 per bowl.Lo estimates monthly fixed costs for a franchise at $10,500.Requirements1. Use the contribution margin ratio approach to find a​franchise's breakeven sales in dollars.2. Lo believes most locations could generate $63,000 in monthly sales. Is franchising a good idea for Lo if franchisees want a minimum monthly operating income of 13,500​?

Answer 1

Selling price = $10.50

Variable cost = $6.30

Fixed cost = $10,500

Contribution margin = Selling price - Variable cost = $10.50 - $6.30 = $4.20

Contribution margin ratio = Contribution margin/Selling price = $4.20/$10.50 = 0.4 = 40%

1. Break even sales = Fixed cost / Contribution margin ratio

Break even sales = $10,500 / 40%

Break even sales = $10,500 / 0.40

Break even sales = $26,250

2. Break even sales = (Fixed cost + Operating income) / Contribution margin ratio

Break even sales = ($10,500 + $13,500) / 40%

Break even sales = $24,000 / 0.40

Break even sales = $60,000

Lo believes most locations could generate $63,000 in monthly sales.

Observation: The monthly sales is greater than the breakeven, so the monthly sales is the best choice.