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.


Requirements


1.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

a) Break-even sales (BEP)= $15,750

b) Yes, the franchise is good because the $63,000 sales that be generated by most locations is higher than the minimum sales revenue of $36,000 required to achieve the the target profit

Step-by-step explanation:

a)

Contribution margin ratio= (sales-variable cost/sale )× 100

Break -even sales (BEP) = Fixed cost/Contribution margin ratio

CMR = (10.50 -6.30)/ 6.30= 66.7%

BEP= 10,500/66.7%= $15,750

b)

To generate a minimum operating income of $13,500, the franchisee will need to make sales worth:

Sales revenue to achieve pre-determined income=( Fixed cost + Target income)/CMR

= (10,500. + 13,500)/0.667

= $36,000

Yes the franchise is good because the $63,000 sales that be generated by most locations is higher than the minimum sales revenue of $36,000 required to achieve the the target profit