Question

In: Accounting

Larry and Moe operate a large restaurant in a busy downtown area of a large city....

Larry and Moe operate a large restaurant in a busy downtown area of a large city. For breakfast and lunch, they generally have a line of customers waiting. Fire codes prevent them from adding additional seating. The contribution format income statement for the most recent week follows:

Sales (4,960 meals served) $123,008

VC 63, 984

CM $59,024

FC 25,000

NI $34,024

Larry wants to automate food delivery. There would be no more servers. Orders would be placed electronically on iPads located at each table. Food would arrive via an overhead “railroad”. Larry believes that the cost of this system would be $11,200 per week and it would reduce variable costs by $3.00 per person. He thinks that maybe prices could be increased as customers will enjoy the novel environment.

1. Prepare a contribution format income statement using Larry’s predictions. Assume the price and the number of meals served stays the same.

2. Compute the price increase that would be required to achieve a target NI of $40,000 per week.

Expert Solution

1.

Selling price per meals served = $123,008 ÷ 4,960 = $24.80

Variable Cost per person = $63,984 ÷ 4,960 = $12.90

It is given that, would reduce variable costs by $3.00 per person.

Variable Cost per person after automation = $12.90 - $3.00 =$9.90

Variable Cost after automation = 4,960 × $9.90 = $49,104

Fixed Cost = $25,000

It is given that, additional cost of the automated system would be $11,200 per week.

Fixed Cost after automation = $25,000 + $11,200 = $36,200

2. The price increase required to achieve a target NI of $40,000 per week is $25.57 per meals served. The price should be increased by $0.77 per meals.

Contribution margin ratio = (Contribution / Sales) × 100 = ($73,904 / $123,008) × 100 = 60.08%

Sales to achieve target NI = (Fixed Cost + Target NI) ÷ Contribution margin ratio
= ($36,200 + $40,000) ÷ 60.08% = $126,830.89

Price increase = Sales to achieve target NI ÷ Number of meals served = $126,830.89 ÷ 4,960 = $25.57

ekkarill92 answered 1 year ago

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