Question

Owner Shirl Low is considering franchising her Noodles by Low restaurant concept. She believes people will pay $6.00 for a large bowl of noodles. Variable costs are $1.50 per bowl. Low estimates monthly fixed costs for a franchise at $18,000. Read the requirements. Requirement 1. Use the contribution margin ratio approach to find a franchise's breakeven sales in dollars. Begin by showing the formula and then entering the amounts to calculate the breakeven point in sales dollars using the contribution margin approach. (Enter a "0" for any zero balances. Abbreviation used: CM = contribution margin.) + ) / Required sales in dollars + % = Requirement 2. Low believes most locations could generate $75,500 in monthly sales. Is franchising a good idea for Low if franchisees want a minimum monthly operating income of $30,000? Begin by showing the formula and then entering the amounts to calculate the targeted sales dollars required to earn the minimum monthly operating income of $30,000. (Abbreviation used: CM = contribution margin.) ( + ) Required sales in dollars % = Is franchising a good idea for Low if franchisees want a minimum monthly operating income of $30,000? the amount of sales necessary to generate a minimum monthly operating income of $30,000, Low's franchising concept a Since the predicted monthly sales of $75,500 are good idea.

Answer 1

Requirement 1
Contribution Margin ratio =($6.00 - $1.50) / $6.00 =0.75 or 75%
(Operating Income + Fixed Costs) / Contribution Margin ratio =Required Sales in dollars
Required Sales in dollars =[($0 + $18,000) / 75%] =$24,000
Requirement 2
(Operating Income + Fixed Costs) / Contribution Margin ratio =Required Sales in dollars
Required Sales in dollars =[($30,000 + $18,000) / 75%] =$64,000
The monthly Sales of $75,500 is GREATER THAN.
Lows Franchising concept IS A GOOD IDEA.