Q28E - Horngren'S Financial And Managerial Accounting

Question

Owner Shan Mu is considering franchising her Noodles by Mu restaurant concept. She believes people will pay \(10.00 for a large bowl of noodles. Variable costs are \)5.00 per bowl. Mu estimates monthly fixed costs for a franchise at \(9,000.

Requirements

1. Use the contribution margin ratio approach to find a franchise’s breakeven sales in dollars.

2. Mu believes most locations could generate \)61,500 in monthly sales. Is franchising a good idea for Mu if franchisees want a minimum monthly operating income of $21,000? Explain your answer.

Step-by-Step Solution

Answer

Answer

1. Breakeven sales is $18,000

2. Franchising is a good idea, as sales are higher than breakeven sales.

Step 1: Calculation of contribution margin and contribution margin ratio

	$
Sales price per bowl	10
Variable cost per bowl	(5)
Contribution margin per bowl	5
Contribution margin ratio (contribution margin per bowl/ sales price per unit x100)	50%

Step 2: Calculation of breakeven sales in dollars

$$\begin{gathered} \mathit{B}\mathit{r}\mathit{e}\mathit{a}\mathit{k}\mathit{e}\mathit{v}\mathit{e}\mathit{n}\mathbf{ }\mathit{s}\mathit{a}\mathit{l}\mathit{e}\mathit{s}\mathbf{ }\mathit{i}\mathit{n}\mathbf{ }\mathit{d}\mathit{o}\mathit{l}\mathit{l}\mathit{a}\mathit{r}\mathit{s}\mathbf{=}\frac{\mathbf{F}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{ }\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}}{\mathbf{C}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{r}\mathbf{i}\mathbf{b}\mathbf{u}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{ }\mathbf{m}\mathbf{a}\mathbf{r}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{ }\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}}{\mathbf{50}\mathbf{\%}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{18}\mathbf{,}\mathbf{000} \end{gathered}$$

Step 3: Profitability analysis

$$\begin{gathered} \mathit{R}\mathit{e}\mathit{q}\mathit{u}\mathit{i}\mathit{r}\mathit{e}\mathit{d}\mathbf{ }\mathit{s}\mathit{a}\mathit{l}\mathit{e}\mathit{s}\mathbf{ }\mathit{i}\mathit{n}\mathbf{ }\mathit{d}\mathit{o}\mathit{l}\mathit{l}\mathit{a}\mathit{r}\mathit{s}\mathbf{=}\frac{\mathbf{f}\mathbf{i}\mathbf{x}\mathbf{e}\mathbf{d}\mathbf{ }\mathbf{cos}\mathbf{t}\mathbf{+}\mathbf{t}\mathbf{a}\mathbf{r}\mathbf{g}\mathbf{e}\mathbf{t}\mathbf{ }\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}}{\mathbf{C}\mathbf{o}\mathbf{n}\mathbf{t}\mathbf{r}\mathbf{i}\mathbf{b}\mathbf{u}\mathbf{t}\mathbf{i}\mathbf{o}\mathbf{n}\mathbf{ }\mathbf{m}\mathbf{a}\mathbf{r}\mathbf{g}\mathbf{i}\mathbf{n}\mathbf{ }\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{o}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\frac{\mathbf{\$}\mathbf{9}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{21}\mathbf{,}\mathbf{000}}{\mathbf{50}\mathbf{\%}} \\ \mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{ }\mathbf{=}\mathbf{\$}\mathbf{60}\mathbf{,}\mathbf{000} \end{gathered}$$

Yes, franchising is a good idea because Mu is expecting a monthly sales of $61,500 and company’s breakeven point is $60,000.