Question

Special-Order Pricing Barry’s Bar-B-Que is a popular lunch-time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 500 patrons for his $11.10 lunch. His variable cost for each meal is about $3.70, and he figures his fixed costs, on a daily basis, are about $2,900. From time to time, bus-tour groups with 50 patrons stop by. He has welcomed them because he has capacity to seat 600 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $5.20 per meal for each of the 50 bus-tour members. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Required:

1-a. What is the incremental profit (loss) per bus-tour meal?

1-b. Should Barry accept the bus-tour offer?

2-a. What is the incremental profit (loss) for each meal if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $4.60 per meal?

2-b. Is the offer financially attractive?

Answer 1

1-a]	Incremental profit per bus tour meal = 50*(5.20-3.70) =	$               75.00
1-b]	Yes, Barry should accept the bus offer.
2-a]	Contribution margin for 200 patrons = 200*(4.60-3.70) =	$             180.00
	Contribution margin lost on existing patrons = 100*(11.10-3.70) =	$             740.00
	[Incremental loss = 740-180 ]	$ (560.00)
2-b]	The offer is not financially attractive

Answers per meal

1-a]	The incremental profit per meal = 5.20-3.70 =	$                 1.50
2-a]	The incremental loss per meal = 560/200 =	$               (2.80)