Cost/volume/profit Relationships

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Assignment 2 – Question 3 (2 marks)

Maria’s Restaurant is interested in increasing their lunch sales and would like to introduce a “grab-n-go” lunch feature. Customers will be able to see what the special “grab-n-go” lunch special is through twitter at 10:30am each morning and then pick up the lunch special in a bag and eat it where ever they choose. Maria’s restaurant is considering selling the lunches at $16.49 which has a variable cost of $4.26. How many customers would have to buy the lunch “grab-n-go” feature each day for the restaurant to break even if their fixed costs are $31,728. (2 marks)

# of customers= Fixed Cost+ Profit/ CR

= $31,728+ 0/ (1- 4.26/16.49)

= $31,728/ 0.74

=42,875

Assignment 2 – Question 4 (4 marks)

Sue is considering a new advertising campaign for the launch of the sweet potato fries. The advertising campaign will cost $3,800. In order for it to be worth the extra effort, Sue needs to earn $4,000 in additional profit from the campaign. Food costs are the only variable costs and they are expected to remain consistent with the previous year. Should Sue invest in the campaign? (4 marks)

SALES REVENUE

Food $175, 000

Liquor $ 25,000

COSTS

Food $ 47,500

Liquor $ 6,000

Sue should not invest in the campaign because she might not able to have a good profit. She needs to keep food cost consistent and also pay $4000 more in order to be worth the extra effort, which she needs to increase liquor sales or decrease the costs. Sue might not be capable to increase liquor costs plus the cost for advertising.