Question

The Grand Inn is a restaurant in Flagstaff, Arizona. It specializes in southwestern style meals in a moderate price range. Paul Weld, the manager of Grand, has determined that during the last 2 years the sales mix and contribution margin ratio of its offerings are as follows.

		Percent of Total Sales			Contribution Margin Ratio
Appetizers		15	%		70	%
Main entrees		50	%		25	%
Desserts		10	%		70	%
Beverages		25	%		80	%

Paul is considering a variety of options to try to improve the profitability of the restaurant. His goal is to generate a target net income of $117,000. The company has fixed costs of $1,343,000 per year.

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Calculate the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income. (Round intermediate calculations to 3 decimal places e.g. 0.251 and final answers to 0 decimal places, e.g. 2,510.)

Total restaurant sales

$

		Sales from Each Product
Appetizers		$
Main entrees		$
Desserts		$
Beverages		$

eTextbook and Media

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Paul believes the restaurant could greatly improve its profitability by reducing the complexity and selling price of its entrees to increase the number of clients that it serves. It would then more heavily market its appetizers and beverages. He is proposing to reduce the contribution margin ratio on the main entrees to 10% by dropping the average selling price. He envisions an expansion of the restaurant that would increase fixed costs by $585,000. At the same time, he is proposing to change the sales mix to the following.

		Percent of Total Sales			Contribution Margin Ratio
Appetizers		25	%		70	%
Main entrees		25	%		10	%
Desserts		10	%		70	%
Beverages		40	%		80	%

Compute the total restaurant sales, and the sales of each product line that would be necessary to achieve the desired target net income. (Round intermediate calculations to 3 decimal places e.g. 10.251 and final answers to 0 decimal places, e.g. 2,510.)

Total restaurant sales

$

		Sales from Each Product
Appetizers		$
Main entrees		$
Desserts		$
Beverages		$

eTextbook and Media

Incorrect answer iconYour answer is incorrect.

Suppose that Paul reduces the selling price on entrees and increases fixed costs as proposed in part (b), but customers are not swayed by the marketing efforts and the sales mix remains what it was in part (a). Compute the total restaurant sales and the sales of each product line that would be necessary to achieve the desired target net income. (Round intermediate calculations to 3 decimal places e.g. 10.251 and final answers to 0 decimal places, e.g. 2,510.)

Total restaurant sales

$

		Sales from Each Product
Appetizers		$
Main entrees		$
Desserts		$
Beverages		$

Answer 1

a)

Calculation of total restaurant sales and sales from each product:

А. B с D E Contribution Particulars Percent of Contribution total sales Margin Ratio Sales from each product 1 0.7 0.25 0.7 0.8 2 Appetizers 0.15 3 Main entrees 0.5 4 Desserts 0.1 5 Beverages 0.25 6 Total 7 Target net income 117000 8 Fixed costs 1343000 9 Total restaurant sales =B7+B8/D6 =B2%C2 =B9%B2 =B3*C3 =B9%B3 =B4%C4 =B9%B4 =B5*C5 =B9%B5 =SUMD2:D5|

Results of the excel sheet are as follows:

А Particulars 1 2 Appetizers 3 Main entrees 4 Desserts 5 Beverages 6 Total 7 Target net income 8 Fixed costs 9 Total restaurant sales B C D Percent of Contribution Contribution total sales Margin Ratio Margin % 15% 70% 10.500% 50% 25% 12.500% 10% 70% 7.000% 25% 80% 20.000% 50.000% 117000 1343000 2803000 E Sales from each product 420450 1401500 280300 700750

b) Calculation of total restaurant sales and sales from each product:

с Contribution Margin Ratio 0.7 1 А B Percent of total Particulars sales 2 Appetizers 10.25 3 Main entrees 0.25 4 Desserts 0.1 5 Beverages 0.4 6 Total 7 Target net income 117000 8 Fixed costs =1343000+585000 9 Total restaurant sales =B7+B8/D6 D Contribution Margin % =B2*C2 =B3*C3 =B4%C4 =B5*C5 =SUMD2:05) Ε Sales from each product =B9%B2 =B9%B3 =B9%B4 =B9%B5 0.1 0.7 0.8

Results of the excel sheet are as follows:

Particulars Percent of Contribution Contribution total sales Margin Ratio Margin % 25% 70% 17.5% 25% 10% 2.5% 10% 70% 7.0% 40% 80% 32.0% 59.0% 1170001 1928000 3384797 Sales from each product 846199 846199 338480 1353919 2 Appetizers 3 Main entrees 4 Desserts 5 Beverages 6 Total 7 Target net income 8 Fixed costs 9 Total restaurant sales

c) Calculation of total restaurant sales and sales from each product:

B D Particulars Percent of total sales (from part ) Contribution Margin Ratio (from part b) 0.7 Contribution Margin % Sales from each product =B9%B2 =B9%B3 =B9%B4 =B9%B5 0.1 0.7 0.8 2 Appetizers 0.15 3 Main entrees 0.5 4 Desserts 10.1 5 Beverages 0.25 6 Total 7 Target net income 117000 8 Fixed costs =1343000+585000 9 Total restaurant sales =B7+B8/D6 =B2%C2 =B3*C3 =B4*C4 =B5*C5 =SUM(D2:D5)

Results of the excel sheet are as follows:

А D Ε Particulars Contribution Margin % Sales from each product B Percent of total sales (from part a) 15% 50% 10% 25% C Contribution Margin Ratio (from part b) 70% 10% 70% 80% 2 Appetizers 3 Main entrees 4 Desserts 5 Beverages 6 Total 7 Target net income 8 Fixed costs 9 Total restaurant sales 10.5% 5.0% 7.0% 20.0% 42.5% 698021 2326735 465347 1163368 117000 1928000 4653471