Question

Special-Order Pricing Barry’s Bar-B-Que is a popular lunch-time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 800 patrons for his $9.90 lunch. His variable cost for each meal is about $4.00, and he figures his fixed costs, on a daily basis, are about $3,200. From time to time, bus-tour groups with 50 patrons stop by. He has welcomed them because he has capacity to seat 900 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $5.50 per meal for each of the 50 bus-tour members.

Required:

1-a. What is the incremental profit (loss) per bus-tour meal?

1-b. Should Barry accept the bus-tour offer?

2-a. What is the incremental profit (loss) for each meal if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $5.00 per meal?

2-b. Is the offer financially attractive?

Answer 1

1-a. Determine the incremental profit (loss) per bus-tour meal as shown below: Incremental profit (loss) = Price charged per bus-tour meal - Variable cost per meal = $5.50 per meal - $4.00 per meal = $1.50 per meal Thus, the incremental profit per bus-tour meal is $1.50 1-b. B should accept the offer because the B earns incremental profit of $1.50 for each meal when it is charged just $5.50 each. Thus, B should accept the bus-tour offer.

2-a. Determine the incremental profit (loss) per meal as shown below: Details Price to be charged per meal Less: Variable cost per meal Less: Fixed cost per meal [$3,200 – 900 diners] Incremental profit (loss) per meal Amount $5.00 $4.00 $3.56 ($2.56) Thus, the incremental loss per meal is $2.56. 2-b. In the present the offer is not attractive because there is an incremental loss per meal of $2.56. Thus, the offer is not financially attractive.