Barrys Bar-B-Que is a popular lunch time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 600 patrons for his $5 lunch. His variable costs for each meal is about $2, and he figures his fixed costs, on a daily basis, are about $1,200. From time to time, bus-tour groups with 50 patrons stop by. He has welcomed them because he has capacity to seat 700 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $3.50 per meal for each of the 50 bus-tour members.

REQUIRED:

A. What is the incremental profit (or loss) per bus-tour meal, assuming the current price of $5 per meal? Should Barry accept the bus-tour offer? Explain your answer.

B. What if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $3.00 per meal? What is the incremental profit (or loss) for each meal? Is the offer financially attractive ie should Barry accept this offer?

C. How does the existence of excess capacity affect the decision to accept or reject a special order?