ACC 560 Week 4 Assignment
P6-4A The Creekside Inn is a restaurant in Tucson, Arizona. It specializes in southwestern style meals in a moderate price range. Terry Wilson, the manager of Creekside, has determined that during the last 2 years the sales mix and contribution margin ratio of its offerings are as follows.
Percent of Total Sales Contribution Margin Ratio
Appetizers 10% 60%
Main entrees 60% 30%
Desserts 10% 50%
Beverages 20% 80%
Terry is considering a variety of options to try to improve the profitability of the restaurant. Her goal is to generate a target net income of $150,000.The company has fixed costs of $1,200,000 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.
b. Terry 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. She is proposing to drop the contribution margin ratio on the main entrees to 10% by dropping 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.
Percent of Total Sales Contribution Margin Ratio
Appetizers 20% 60%
Main entrees 30% 10%
Desserts 10% 50%
Beverages 40% 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 Terry drops the selling price on entrees and increases fixed costs as proposed in the second part of the question, but customers are not swayed by the marketing efforts and the sales mix remains what it was in the first part of the question. Compute the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income.
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