WMM operated a chain of Quick Service Restaurants (QSR) in business localities in the GTA, Mississauga, Brampton, Oakville, Kitchener, Waterloo, and Cambridge. Their first outlet opened in 2007 in Vaughn and then continued to expand to other areas. WMM outlets offered food and beverages for takeout and delivery only. There was no dine in option available. The rapid expansion of food delivery service provided a strong headwind for WMM. Since their outlets did not require a prominent location, the leasing costs were minimized.

The above factors contributed to the success and growth of WMM till Covid struck in early 2020. Most the revenue generated by WMM was from lunch items, afternoon snacks and early evening dinners consumed by clients working in their offices. With 90% of client working from home, the demand for such services almost disappeared overnight. WMM had to downsize its operations, close outlets, and lay off nearly 60% of its workforce.

Positive news began to appear in April 21 with the arrival of vaccines in Canada. Both the Federal and Provincial governments expressed confidence of vaccinating a majority of the population by Fall 21 and allow restaurant businesses to function normally by November 21. About business partners Maria Jimenez (Maria) is the Senior Vice President- Marketing. She spent over fifteen years with Fortune 500 companies in the Consumer-Packaged Goods sector. She developed multi channel marketing strategies for WMM which led to WMM being positioned as an agile, innovating enterprise. Julia Smith (Julia) was the Corporate Chef of WMM. She spent nearly twenty years with leading hotel chains in Western Canada before taking on the current role in WMM. She displayed exemplary skills at developing new products which contributed to the profitability of WMM. Adam Wiseman (Adam) was the Chief Financial Officer of WMM. He too came from a hospitality background, having worked with leading hotel chains in Toronto.

His expertise was in Capital Budgeting and product costing, which worked well in conjunction with the culinary skills of Julia when new products were being developed. Yetunde Jones (Tunde) was the Senior Vice President-Operations. His background was as a General Manager in Fast Food Outlets. With his exemplary people skills and ability to train new hires, WMM was able to hire operations staff with little or no experience and develop them to high performing team members.

ISSUE:

Product costing and estimation of manufacturing volume to meet financial goals The consulting group wanted to develop a Contribution Margin Income statement and conduct a Cost- Volume-Profit Analysis so that the estimated manufacturing volume can be projected. If this estimated volume could be sold entirely, then the target profitability can be met.

QUESTION:

Based on the following Contribution Margin Income Statement the consulting group would like to evaluate if adding sales expenses as a fixed cost would be a beneficial strategy.

Projected Contribution Margin Income Statement

Sales volume of package food items (Units)	40,000
Revenue	$800,000
Variable Expenses	$560,000
Contribution Margin	$240,000
Fixed Expenses	$192,000
Net Operating Income	$48,000

Methodology: The consulting group would assume that all packaged food items sell at the same price per unit. The above model assumes that sales commission is a variable expense and that salespersons are paid for each unit they sell. In order to incentivize salespersons, the consulting group is proposing that salespersons be hired on salary and not on commission basis. Combine this with additional advertising, the fixed expenses would increase to $ 300,000. This would also lead to an increase in revenue to the extent of 50% and net operating income by 25%. The group will calculate the breakeven sales under the above scenario and breakeven sales dollars at that level. They will also advise the business partners on potential risks that may arise in this case and recommend if this approach of adding fixed cost related to selling is recommended.