Kangaroo company is a holding company that owns companies in various industries. Kangaroo is thinking of purchasing an existing grocery store and is choosing among three alternatives: a discount grocery store, a grocery store that would compete with chain grocery stores, and a premium grocery store.

Research has gleaned the following information on the three alternatives.

	Discount store	Conventional store	Premium store
Quarterly fixed cost	$7,500,000	$9,500,000	$12,500,000
Contribution margin ratio	42%	46%	55%
Projected quarterly sales	$19,000,000	$22,000,000	$24,000,000

Assume the initial investment in each facility is equal. Based solely on financial consideration, which stores type would you recommend?

	Discount store	Conventional store	Premium store
Quarterly fixed cost	$7,500,000	$9,500,000	$12,500,000
Contribution margin ratio	42%	46%	55%
Projected quarterly sales	$19,000,000	$22,000,000	$24,000,000
Breakeven revenue
Quarterly profit

Answer

Question 2

John's bookkeeping and tax services to hotels and restaurants. John's charges customers $50 for any work done. John has five employees. John pays each employee $50,000 per year and each employee provides 2,000 hours of work per year. Another fixed cost at john's amounts to $150,000 per year variable cost is $5 per hour. John expects to provide 9,500 hours of work to its customers in the upcoming year.

Provide a worksheet for a contribution margin income statement, showing per unit and total amounts, to answer each of the following questions.

Required

1. What is the expected operating profit in the base case scenario above?

Contribution Margin Income Statement
	Per Unit	Total
Sales	$50
VC	5
CM	$45
FC
OI

B. John believes that if the hourly rate is reduced to $46.00, demand will jump to 11,000 hours. However, the variable cost will increase to$7.00 per hour because the employee will have to pay overtime in addition to their fixed wage. What is the expected operating profit in this scenario?

Contribution Margin Income Statement
	Per Unit	Total
Sales	$46
VC	7
CM	$39
FC
OI

C. John's thinking of using a piece rate approach to compensation. Workers would be paid $150 for each job they complete. The average number of hours per job is 5. Therefore, the total average variable cost per job will be $175 ($150plus $5*5 for another variable cost). John feels that this will increase worker productivity. If the average price job is set to $240 john feels that the potential demand will be 2600 jobs. However, even though worker productivity is expected to increase in the piece-rate system, the total number of jobs the five employees will be able to deliver is only 2,500. What is the expected operating profit in this scenario?

Contribution Margin Income Statement
	Per Unit	Total
Sales
VC
CM
FC
OI

Question3

Oh, my bagel co. operates a bagel store in Niagara Falls. The owner has provided the following budgeted data for next month

Revenue	$11,450
Fixed cost	3,185
Variable costs depend upon the number of bagels sold	7,700

Required

For each scenario, determine the dollar impact on Oh My Bagel's

• Revenue
• Variable cost
• Fixed cost
• Contribution margin
• Budgeted operating profit

Consider each scenario independently.

Scenario-1: 5% increase in FC:

Scenario-2:A 10% increase in contribution margin, but holding revenue constant:

Scenario-3: A 15% increase in fixed costs and 10% increase in units sold.

Question-4:

Canadue Steaks is a restaurant that only serves steak dinners. The contribution margin for the month of July is presented below.

Sales: $18,000

Variable Costs: 9,900

Contribution Margin: 8,100

Fixed Costs: 4,500

Operating Profit: $3,600

The supporting documents reveal that 600 dinners were sold during the month.

a) Determine the degree of operating leverage.

b) What is the percent change in operating profit if the number of steak dinners sold in August increases to 720 dinners? (Use the degree of operating leverage in your answer)

c) If sales volume increases to 720 dinners in August, how much operating profit should Canadue expect?

Question-5:

Bliss Company wants to open a new spa in a nearby plaza. Bliss Company will be offering half-day spa treatments

for $150 each. Variable costs (not including the leasing costs below) are $95 for every treatment.

In terms of lease payments, the plaza has provided the company with three options:

i) $25 per treatment given

ii) $20,000 per month

iii) $15,000 per month and $10 per treatment given

a) Calculate the monthly operating profit for each of the three options if 300 treatments are given and if 700 treatments are given.

Option i)

Option ii)

Option iii)

b) At a level of 700 treatments, which option should be recommended?

c) Calculate the degree of operating leverage for the second lease option if Bliss Company gives 700 treatments.