The Creekside Inn is a restaurant that specializes in southwestern style meals in a moderate price range.

Question:

The Creekside Inn is a restaurant that specializes in southwestern style meals in a moderate price range. Terry Ducasse, the manager of Creekside, has determined that during the last two years the sales mix and contribution margin ratio of its offerings have been as follows:

Terry is considering a variety of options to try to improve the restaurant's profitability. Her goal is to generate a target operating income of $150,000. The company has fixed costs of $1.2 million per year.
Instructions
(a) Calculate the total restaurant sales and the sales of each product line that would be necessary in order to achieve the desired target operating income.
(b) Terry believes the restaurant could greatly improve its profitability by reducing the complexity and selling prices of its entrees to increase the number of clients that it serves, and by more heavily marketing its appetizers and beverages. She is proposing to drop the contribution margin ratio on the main entrees to 10% by reducing the average selling price. She envisions an expansion of the restaurant that would increase fixed costs by 50%. At the same time, she is proposing to change the sales mix to the following:

Calculate the total restaurant sales and the sales of each product line that would be necessary in order to achieve the desired target operating income if Terry's changes are implemented.
(c) Suppose that Terry drops the selling price on entrees and increases fixed costs as proposed in part (b), but customers are not swayed by the marketing efforts and the product mix remains what it was in part (a). Calculate the total restaurant sales and the sales of each product line that would be necessary in order to achieve the desired target operating income. Comment on the potential risks and benefits of this strategy.