Question

1. The owner of a small restaurant that sells burgers pays each month $1,000 in rent, $300 in utilities, $200 interest on his loan, and $500 on advertising on local buses. A burger sandwich is priced at $4.00. Unit variable costs for the burger sandwich is $2.00.
   1. Calculate unit margin and monthly fixed cost.
   2. How many sandwiches does the restaurant need to sell to break-even each month?
   3. Calculate Total Cost at Break even
   4. Calculate Total Revenue at Break even.
   5. How many sandwiches does the restaurant need to sell to earn $500 profit each month?
   6. Suppose restaurant sells 1200 burgers each month. Calculate profit.
   7. Suppose restaurant sells 1200 burgers each month. Owner is thinking whether to advertise also in local TV to increase demand. Local TV ads costs $500 monthly. How many more burgers should restaurant sell in order to at least offset local TV advertising costs?
   8. Suppose restaurant sells 1200 burgers at $4 eac Owner is thinking whether to increase the price to $4.5. But he knows that the price increase will drop the demand to 1100 burgers. Should he increase the price or not?  

2. Atrium, a manufacturer of upscale designer tee-shirts, is considering launching an Internet operation to sell its product direct to consumers in addition to distributing through traditional bricks-and-mortar retail stores. Management believes an Internet presence should augment its retail operation. Atrium tee-shirts, made of 100% refined woven cotton, feature batik prints. The cost of producing an Atrium designer tee-shirt is $6.50 per shirt.        

Internet: In selling tee-shirts on the Web, the company must hire a Web page architect to design the page and maintain it over the course of a year. The salary for a Web page architect is $60,000, including expenses and benefits. Shipping on Internet orders, which is to be included in the retail price of the tee-shirts, is estimated to be $4.20 per shirt.

Physical Store distribution: Atrium could also sell its tee-shirts in its own retail store.  Additional in-store promotion and a local print advertising campaign for a year will cost Atrium $80,000.

Based on the above information, answer the following questions. Please Show Your Calculations.

1. Suppose Atrium manager decides to sell only through its website. If it can sell 10,000 tee-shirts from its Web page, what’s the break-even price?
2. Now assume Atrium sells only through its physical store. If Atrium tee-shirts sell for $32 at the retail stores, how many tee-shirts must Atrium sell to break even?
3. If the physical store can sell 5,000 tee-shirts at $40 a piece, how much profit can Atrium make through its physical store?

The retailer can sell 5,000 tee-shirts at $40 a piece. If the retailer lowers the price to $35 a piece, he can sell an additional 1,500 tee-shirts. What is the demand elasticity?

Answer 1

Hi. Solving first 4 parts as per chegg policy. Please post the rest separately. Thank you.

A. The unit margin can be calculated by

Unit margin=Price per unit-variable cost per unit.

Putting in given values, we get

Unit margin=$4-$2=$2.

Fixed costs are all other costs that are not part of producing the product. So, in our case

Fixed Cost=Rent+Utilities+Interest+Advertisement.

Putting in given values, we get

Fixed Cost=1000+300+200+500

=$2000

B. To break even, the restaurant must cover the fixed costs each month too. Since the margin is 2 per sandwich and the total fixed costs are 2000, then

Number of sandwiches to be sold to break even= 2000/2=1000.

C. Total cost at break even=Fixed Cost+variable cost at break even.

So,

Total cost at break even= 2000+2*1000=$4000.

D. Total revenue at break even=

Quantity sold at break even*price per quantity at break even.

So,

Total revenue at break even=4*1000=$4000.