Question

Minnie has just inherited the Disney Inn from her great, great Uncle Walt. Minnie met with Donald, the manager of Disney, and was shown the information below. Donald says his brother, a CPA has calculated the restaurant’s current overall contribution margin ratio at 45%.   Minnie’s eyes glaze over. She is a famous actress with no business or restaurant background. She does however enjoy eating food especially cheese.

	Percent of Total Sales	Contribution Margin Ratio
Appetizers	10%	60%
Main Entrees	60%	30%
Desserts	10%	50%
Beverages	20%	80%

Minnie would like to settle down and retire from the acting world and she sees this as her opportunity. Minnie knows you are a smart Hill School of Business student and comes to you for help.

In order for Minnie to be able to retire she believes she needs a net take home annual salary of $112,000. Luckily, Donald has been considering a variety of options to try to improve the restaurant’s profitability. Donald’s goal was to generate a target before tax operating income of $100,000. This target was before he knew about Minnie’s salary requirement. Minnie’s personal tax rate is 30%. The Disney Inn presently has fixed costs of $1.2 million per year.

Donald believes the restaurant could greatly improve its profitability by changing the focus of the restaurant’s menu and an expansion of the restaurant. The expansion of the restaurant would increase fixed costs by 50%. The proposed changes in the sales mix and contribution margins are as follows:

	Percent of Total Sales	Contribution Margin Ratio
Appetizers	20%	60%
Main Entrees	30%	10%
Desserts	10%	50%
Beverages	40%	80%

Minnie says she really needs your help. She has googled successful businesses and believes the focus of her business should be on total sales dollars. She wants to know

1. what would happen financially if the restaurant continued as it is today,
2. what Donald’s suggested plan means, and
3. what the non-financial risks are if customers don’t like the change in the menu focus. Minnie also encourages you to provide
4. any other information she might find helpful in this particular situation.

Answer 1

Answer:-

She has googled successful businesses and believes the focus of her business should be on total sales dollars.

Minnie is not correct that she should concentrate only on sales. The most important factors here are to be considered before making any decision are Overall contribution margin of the business with both the Sales Mix.

As the change in sales mix there is change in Fixed cost. This is also an important factor to be considered before making any decision.

what would happen financially if the restaurant continued as it is today ?

With the current Sales Mix with 45 % overall Margin it has to be found out how much sales are to be done to first cover the fixed cost potion. The Calculation of Overall Margin is given below:-

	Percent of Total Sales	Contribution Margin Ratio	Overall Contribution (Percent total sales X Contribution Margin Ratio)
				Appetizers	10%	60%	6.00%
Main Entrees	60%	30%	18.00%
Desserts	10%	50%	5.00%
Beverages	20%	80%	16.00%
		Total Overall contribution	45.00%

(As the business will first have to earn the Fixed cost first to be able to earn anything as a profit - This is called break even point)

Formula for break even sales = Fixed cost / Contribution Margin

Therefore, if the business is continued with same sales mix break even sales will be 1.2 / 45% = $2.67 Million per year

what Donald’s suggested plan means?

Donald's Plan is to increase the percent sales of the items in the Menu which are giving more more contribution so that the fixed cost can be covered faster and more profit can be earned faster with more overall contribution.

The Calculation of Overall Margin is given below:-

	Percent of Total Sales	Contribution Margin Ratio	Overall Contribution (Percent total sales X Contribution Margin Ratio)
				Appetizers	20%	60%	12.00%
Main Entrees	30%	10%	3.00%
Desserts	10%	50%	5.00%
Beverages	40%	80%	32.00%
		Total Overall contribution	52.00%

This means that Plan of Donald is giving the restaurant more overall contribution. But there is a catch that with this change in sales mix there will be increase in Fixed cost as well hence the new fixed cost is 50% more that is 1.2 X 150% = $1.8 Million.

Therefore, if the business take Donald's plan of sales mix break even sales will be 1.8 / 52% = $3.46 Million per year.

AS THE BREAK EVEN SALES INCREASE WITH THE CHANGE IN THE SALES MIX THE PLAN SHOULD NOT BE ACCEPTED

what the non-financial risks are if customers don’t like the change in the menu focus. Minnie also encourages you to provide?

There are many non financial factors involved such as customers like/ dislikes about the restaurant, there opinion about the best dishes, location of the restaurant, class the restaurant is focusing on, other restaurants around the restaurant etc.

any other information she might find helpful in this particular situation.

Minnie should take a survey in the restaurant from the customer and try to increase the sales of the dish customer most liked. She should also try to reduced fixed cost which is best possible move