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 600 patrons for his $6.10 lunch. His variable cost for each meal is about $2.30, and he figures his fixed costs, on a daily basis, at about $1,500. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat 700 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 $3.80 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.)

1-a.	What is the net benefit (cost) per meal if Barry accepts the $3.80 price? 2-a. What is the net benefit (cost) per meal if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $3.60 per meal? SHOW ALL WORK

Answer 1

Solution:

Solution 1a:

Variable cost per meal = $2.30

Offer price for 50 bus tour members = $3.80

As Barry Bar B-que is having capacity of 700 seat in average lunch period and regular customers are only 600, therefore they can easily accomodate 50 tour bus member without losing regular sale.

Net benefit per meal if offer price accepted = $3.80 - $2.30 = $1.50 per meal

Hence barry should accept offer price.

Solution 2a:

If tour company is willing to guarantee 200 patrons atleast once a month at $3.60 per meal then required capacity will be 800 diners at average lunch period. Now barry is having capacity of 700 diners, therefore if barry accept the offer then there is regular sale loss of 100 diners.

Net revenue from tour company = 200*$3.60 = $720

Cost for 100 meal = 100*2.30 = $230

Revenue loss of regular sale = 100 * $6.10 = $610

Net benefit (Cost) = $720 - $230 - $610 = ($120)

Net benefit (Cost) per meal = ($120) /200 = ($0.60)

As there is additional cost of $0.60, therefore barry should not accept the offer