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The Grand Inn is a restaurant in Flagstaff, Arizona. It specializes in southwestern style meals in a moderate price range. Paul Weld, the manager of
The Grand Inn is a restaurant in Flagstaff, Arizona. It specializes in southwestern style meals in a moderate price range. Paul Weld, the
manager of Grand, has determined that during the last 2 years the sales mix and contribution margin ratio of its offerings are as follows.
Appetizers
Main entrees
Desserts
beverages
Percent of
Total Sales
15%
50%
10%
25%
Contribution
Margin Ratio
50%
25%
50%
80%
Paul is considering a variety of options to try to improve the profitability of the restaurant. His goal is to generate a target net income of $117,000. The company has
fixed costs of $1,053,000 per year.
Instructions
a. Calculate the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income.
a. Total sales $2,600,000
b. Paul believes the restaurant could greatly improve its profitability by reducing the complexity and selling price of its entrees to increase the number of clients that it serves. It would then more heavily market its appetizers and beverages. He is proposing to reduce the contribution margin ratio on the main entrees to 10 % by dropping the average selling price. he envision an expansion of the restaurant that would increase fued costs by $585,000. At the same time, he is porposing to change the sales mix to the following.
b. Total sales $3,375,000
Appetizers
Main entrees
Desserts
beverages
Total Sales
25%
25%
10%
40%
Contribution
Margin ratio
50%
10%
50%
80%
Compute the total restaurant sales, and the sales of each product line that would be necessary to achieve the desired target net income.
c. Suppose that Paul reduces the selling price on entrees and increases fixed costs as proposed in part (b), but castomers are not swayed by the marketing efforts and the sales mix remains what it was in part (a). Compute the total restaurant sales and the sales of each product line that would be necessary to achieve the
desired target net income. Comment on the potential risks and benefits of this strategy.
Determine sales mix with limited resources.
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