Continuation of E7-19: changing business conditions (Learning Objective 3)

Refer to Happy Wok in E7-19. Lo did franchise her restaurant concept. Because of Happy Wok’s success, Noodles-n-More has come on the scene as a competitor. To maintain its market share, Happy Wok will have to lower its sales price to $4.50 per bowl. At the same time, Happy Wok hopes to increase each restaurant’s volume to 6,000 bowls per month by embarking on a marketing campaign. Each franchise will have to contribute $500 per month to cover the advertising costs. Prior to these changes, most locations were selling 5,500 bowls per month.

Requirements 1. What was the average restaurant’s operating income before these changes?

2. Assuming that the price cut and advertising campaign are successful at increas¬ ing volume to the projected level, will the franchisees still earn their target profit of $8,750 per month? Show your calculations.