Question

1) Company Koala is a restaurant in Salihli, Manisa. It specializes in southwestern style meals in moderate price range. Ziya Taskent, the manager of Company X, has determined that during the last 2 years the sales mix and contribution margin ratio of its offerings are as follows:

Item Percent of Total Sales Contribution Margin Ratio

Appetizers 17% 50%

Main Entrees 56% 27%

Desserts 18% 50%

Beverages 88%

Ziya Bey’s goal is to generate a target net income of TL117,000. The company has fixed costs of TL1,058,000 per annum.

a) Calculate the sales of Beverages in TL that would be necessary to achieve the desired target net income.

b) Ziya Bey 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. He is proposing to reduce the contribution margin ratio on the main entrees to 10% by dropping its average selling price. He envisions an expansion of the restaurant that would increase fixed costs by an additional TL586,000. At the same time, he is proposing to change sales mix as follows:

Item Percent of Total Sales Contribution Margin Ratio

Appetizers 25% 54%

Main Entrees 27% 10%

Desserts 10% 58%

Beverages 80%

Calculate the sales of Beverages in TL that would be necessary to achieve the desired target net income.

c) Suppose that Ziya Bey reduces the selling price on entrees and increases the fixed costs as proposed in Question 5, but customers are not swayed by the marketing efforts and the sales mix remains what it was in part a Calculate the sales of Beverages in TL that would be necessary to achieve the desired target net income.

2) Company Whale has an existing machine which is straight line depreciated to process its invoices. Following information pertains to this machine.

Item Amount Unit

Existing machine original cost 100,700 TL

Existing machine total useful life 4 years

Existing machine remaining useful life 3 years

Existing machine operating cost pa 105,800 TL

Existing machine salvage value 50,400 TL

The company is considering replacing this machine with a new one. New machine will cost TL160,000 and will have 3 years useful life. Per annum operating costs of the new machine are TL80,040. Determine if the company should retain or replace the existing machine ignoring the time value of money. (Note enter 1 if the machine is retained, enter 2 if the machine is replaced.)

3) Company Owl operates a small factory in which it manufactures two products: C and D. Production and sales results for last year were as follows:

Item C D

Units sold 9,000 20,000

Selling price per unit 97 75

Variable cost per unit 50 40

Fixed cost per unit 24 24

For purposes of simplicity, the firm averages total fixed costs over the total number of units produced. The research department has developed a new product (E) as a replacement for product D. Market studies show that the firm could sell 10,000 units of E next year at a price of TL114. The variable cost per unit of E is TL46. The introduction of E will lead to a 18% increase in demand for product C and discontinuation of product D. If the company does not introduce the new product, it expects next year’s results to be the same as last year’s.

a) Calculate net income for the next year if the company does not introduce product E.

b) Calculate net income for the next year if the company introduces product E.

Answer 1