Question

Jone’s Burger is a very popular lunch time spot and has a large seating capacity of 700 seats.   It often boasts a lunchtime crowds of 600 customers for Jone’s Lunch Special for $5.00. Joan Jones the owner has roughly calculated the costs on a daily basis, fixed costs $1200, and variable costs to be $2 per lunch meal.

Jone’s Burgers is also a popular spot for bus-tours. On average, the bus tours would have 50 customers stop-by. Joan welcomes the bus-tours as the establishment can easily the additional customers. The bus tour operators pay for the entire group and does not increase any fixed costs. As tours have become less frequent due to added competition, the tour operators are requesting that the lunch price be reduced to $3.50 for each of the 50 customers on the bus.

Required:

1. (10marks) What is the incremental profit (loss) per bus-tour meal? Should Joan accept the new tour operator request? Provide your rationale.

2. What if the tour operator could generate 200 customers (4 bus loads) once a month for $3.00 per meal? What is the incremental profit (loss) for each meal? What advice would you give to Joan – is this something she should consider?

Answer 1

a) Calculation of incremental profit (loss) per bus-tour meal:

Price of per meal = $3.50

Variable cost of per meal = $2.00

Contribution per meal = $1.50 (i.e. $3.50-$2.00)

Fixed Cost (irrelevant cost) = $0.00

Profit = $1.50 (i.e. $1.50-$0.00)

There would be an incremental profit of $1.50 per meal, hence Joan should accept the new tour operator request.

b) Calculation of incremental profit (loss) for 4 bus-tour per meal:

Price of per meal = $3

Variable cost of per meal    = $2

Contribution per meal = $1 (i.e. $3-$2)

*Fixed Cost ($1,200/700) = $1.71

Loss = $0.71 (i.e. $1.00-$1.71)

There would be an incremental loss of $0.71 per meal, hence Joan should not accept this new tour operator request.

*Since Jone’s Burger has a seating capacity of 700 seats, out of this 600 seats is already engaged for regular customer, so Jone’s Burger have only 100 spare seats available & but requirement is for 200 seats. Thus, to provide service to 200 new customer from 4 tour bus Jone’s Burger need to expand their seating capacity & this require an additional fixed cost of $1,200 which provides 700 additonal seating capacity.

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