Calculate total and average costs (Learning Objective 7)

The owner of New York Deli restaurant is disappointed because the restaurant has been averaging 4,000 sandwich sales per month, but the restaurant can make and serve 6,000 sandwiches per month. The variable cost (for example, ingredients) of each sandwich is $1.25. Monthly fixed costs (for example, depreciation, property taxes, business license, manager’s salary) are $6,000 per month. The owner wants cost information about different volumes so that he can make some operating decisions.

Requirements 1.Fill in the chart below to provide the owner with the cost information he wants. Then use the completed chart to help you answer the remaining questions.

2. From a cost standpoint, why do companies such as New York Deli want to operate near or at full capacity?
3. The owner has been considering ways to increase the sales volume. He believes he could sell 6,000 sandwiches a month by cutting the sales price from $6.00 a sand¬ wich to $5.50. How much extra profit (above the current level) would he generate if he decreased the sales price? {Hint: Find the deli’s current monthly profit and compare it to the deli’s projected monthly profit at the new sales price and volume.)

4. The owner’s other idea is to advertise his restaurant on the local radio stations.
If he keeps the sales price at $6 per sandwich, the advertising agency says he’ll have to spend $4,000 in advertising each month to increase monthly sales to 6,000 sandwiches. How much extra profit (above the current level) would he generate if he kept the sales price at $6 per sandwich but spent $4,000 per month on advertising? Which of the owner’s two ideas is most profitable?
5. The owner is surprised by your calculations. Because the current average profit per sandwich is $3.25, he thought the restaurant would make $19,500 of income per month (before advertising costs) if it sold 6,000 sandwiches at the normal $6.00 sales price. How did the owner arrive at this figure, and why is it wrong?

Transcribed Image Text:

Monthly sandwich volume Total fixed costs Total variable costs Total costs Fixed cost per sandwich Variable cost per sandwich Average cost per sandwich 3,000 4,000 6,000 +A $ | $ CA GA SA || $ | | EA $ Sales price per sandwich $6.00 Average profit per sandwich $6.00 $6.00