Question

g. 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 500 patrons for his $9.40 lunch. His variable cost for each meal is about $3.00, and he figures his fixed costs, on a daily basis, at about $2,200. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat 600 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 $4.50 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.)

Required: 1-a. What is the net benefit (cost) per meal if Barry accepts the $4.50 price?

1-b. Should Barry accept the $4.50 price? Yes No

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 $4.30 per meal?

2-b. Should Barry accept the offer? Yes No

Answer 1

Solution 1:

Existing regular crowd = 500 patrons

Existing capacity = 600 Patron

Therefore Bar-B-Que is having additional capacity and can easily accomodate bus tour group of 50 bus tour members.

Price offered of group tour members = $4.50 per meal

Variable cost per meal = $3.00 per meal

Net benefits per meal if Barry accept offer = $4.50 - $3 = $1.50 per meal

As there is benefit per meal of $1.50, hence barry should accept the price.

Solution 2:

If tour company were willing to guarantee 200 patrons at least once a month for $4.30 per meal then Barry will have capacity constraint as total patrons will reach to 700 (500+200), therefore Barry to loose sale of 100 regular patron at $9.40 per meal.

Therefore additional revenue for 200 patron = 200*4.30 = $860

Loss of revenue of regular 100 patron = 100 * 9.40 = $940

Additional cost of 100 patrons = 100*3 = $300

Net benefit (Cost) = $860 - $940 - $300 = ($380)

Net benefit (Cost) per meal = ($380)/200 = ($1.90) per meal.

As there is net cost to barry $1.90 per meal, therefore barry should not accept the offer.