Question

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	%		70	%
Main entrees		50	%		25	%
Desserts		10	%		70	%
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 $1,362,000 per year.

Calculate the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income. (Round intermediate calculations to 3 decimal places e.g. 0.251 and final answers to 0 decimal places, e.g. 2,510.)

Total restaurant sales

$

		Sales from Each Product
Appetizers		$
Main entrees		$
Desserts		$
Beverages		$

eTextbook and Media

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	%		70	%
Main entrees		25	%		10	%
Desserts		10	%		70	%
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. (Round intermediate calculations to 3 decimal places e.g. 10.251 and final answers to 0 decimal places, e.g. 2,510.)

Total restaurant sales

$

		Sales from Each Product
Appetizers		$
Main entrees		$
Desserts		$
Beverages		$

eTextbook and Media

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. (Round intermediate calculations to 3 decimal places e.g. 10.251 and final answers to 0 decimal places, e.g. 2,510.)

Total restaurant sales

$

		Sales from Each Product
Appetizers		$
Main entrees		$
Desserts		$
Beverages		$

Answer 1

ORIGINAL SALES MIX AND CONTRIBUTION MARGIN RATIO We know, Contribution is net of variable costs incurred. So, let the total sales be 'x'. Total Sales = Appetizers + Main Entrees +Desserts + Beverages x = 0.15x +0.50x + 0.10x +0.25x The above will be multiplied with margin to arrive at margin from each product Income to be earned = (0.15x * 0.70) + (0.50x * 0.25) + (0.10x * 0.70) + (0.25x * 0.80) + 1,362,000 117,000 +1,362,000 = 0.5x x = $ 2,958,000 TOTAL RESTAURANT SALES = $ 2,958,000 Sales of each product and verification : Appetizers = 2,958,000 * 15% = $ 443,700 Margin = 443,700 * 0.70 = $ 310,590 Main Entrees = 2,958,000 * 50% = $ 1,479,000 Margin = 1,479,000 * 0.25 = $ 369,750 Desserts = 2,958,000 * 10% = $ 295,800 Margin = 295,800 * 0.70 = $ 207,060 Beverages = 2,958,000 * 25% = $ 739,500 Margin = 739,500 * 0.80 = $ 591,600 TOTAL MARGIN = $ 1,479,000 Reduce Fixed costs of $ 1,362,000 & Net Income will be $ 117,000 * REVISED SALES MIX AND CONTRIBUTION MARGIN RATIO Total Sales = Appetizers + Main Entrees + Desserts + Beverages x = 0.25x +0.25x + 0.10x +0.40x The above will be multiplied with margin to arrive at margin from each product Income to be earned = (0.25x * 0.70) + (0.25x * 0.10) + (0.10x * 0.70) + (0.40x * 0.80) +1,947,000 117,000 + 1,947,000 = 0.59x x = $ 3,498,305 TOTAL RESTAURANT SALES = $ 3,498,305 Sales of each product and verification :- Appetizers = 3,498,305 * 25% = $ 874,576 Margin = 874,576 * 0.70 = $ 612,203 Main Entrees = 3,498,305 * 25% = $ 874,576 Margin = 874,576 * 0.10 = $ 87,458 Desserts = 3,498,305 * 10% = $ 349,831 Margin = 349,831 * 0.70 = $ 244,882 Beverages = 3,498,305 * 40% = $ 1,399,322 Margin = 1,399,322 * 0.80 = $ 1,119,457 TOTAL MARGIN = $ 2,064,000 Reduce Fixed costs of $ 1,947,000 & Net Income will be $ 117,000 COMBINATION OF A & B ABOVE Total Sales = Appetizers + Main Entrees + Desserts + Beverages x = 0.15x + 0.50x + 0.10x +0.25x The above will be multiplied with margin to arrive at margin from each product * COMBINATION OF A & B ABOVE Total Sales = Appetizers + Main Entrees + Desserts + Beverages x = 0.15x +0.50x +0.10x +0.25x The above will be multiplied with margin to arrive at margin from each product Income to be earned = (0.15x * 0.70) + (0.50x * 0.10) + (0.10x * 0.70) + (0.25x * 0.80) +1,947,000 117,000 + 1,947,000 = 0.425x x = $4,856,471 TOTAL RESTAURANT SALES = $ 4,856,471 Appetizers = 4,856,471 * 15% = $ 728,470 Margin = 728,470 * 0.70 = $509,929 Main Entrees = 4,856,471 * 50% = $ 2,428,236 Margin = 2,428,236 * 0.10 = $ 242,824 Desserts = 4,856,471 * 10% = $ 485,647 Margin = 485,647 * 0.70 = $ 339,953 Beverages = 4,856,471 * 25% = $1,214,118 Margin = 1,214,118 * 0.80 = $ 971,294 TOTAL MARGIN = $ 2,064,000 Reduce Fixed costs of $ 1,947,000 & Net Income will be $ 117,000