MGT705 - Assignment # 1 - Fall 2012

[MSBA_124]

ASSIGNMENT
A restaurant sells fast food products. One of the restaurants products, a burger, sells for Rs. 90 per unit. Cost of bread used Rs. 20 per burger, cost of ketchup used Rs. 5 per burger, cost of vegetables used Rs. 5 per burger, cost of eggs used Rs. 15 per burger, cost of spices used Rs. 10 per burger, Cost of mayonnaise used Rs. 8 per burger, salaries of worker Rs. 50,000, rent of restaurant Rs. 70,000 and other fixed cost are associated with the product Rs. 15,000.

Required:
1.Compute the restaurant’s Break Even Point in number of burgers and in total sales amount for the month. Marks: 2.5+2.5 = 05

Solution:

GIVEN:

Cost of bread = Rs.20
Cost of ketchup = Rs.5
Cost of vegetable =Rs.5
Cost of eggs = Rs.15
Cost of spices = Rs.10
Cost of mayonnaise = Rs.8
Total variable cost per burger= Rs.63
Fixed cost = worker salaries + rent of restaurant + other fixed cost
=50,000 + 70,000 + 15,000
Fixed cost =Rs.135000
Sales price per burger=Rs.90
Contribution margin =sales – variable cost
= 90-63
=27
Break-even in number of burger= Fixed Costs / (Contribution Per burger)

= 135000/27
=135000/27
=5,000 burger
Break even in sale= break even in number of burgers * selling price
Break even in sale= 5000 * 90
Break even in sale= Rs.450000

Suppose variable expenses per burger increase 10% of the selling price (fixed cost remain unchanged) then

Before increase Variable expense

Break-even volume = Fixed Costs / (Contribution Per burger)

= 135000/90-63
=135000/27
=5,000 burger
Break even in sale= break even in number of burgers * selling price
= 5000 * 90
= Rs.450000
After 10% increase in Variable expense

Variable expense = 63+90*10%
= 63+90
=72
Break-even volume = Fixed Costs / (Contribution Per burger)

= 135000/90-72
=135000/18
=7500 burger
Break even in sale= break even in number of burgers * selling price
= 7500 * 90
= Rs.675000

Increase in variable expenses will result lower contribution margin hence increased breakeven that means you have to sell more products before you start making a profit than before.

Q
At present, the restaurant is selling 8,000 burgers per month. The sales manager is convinced that a 10% reduction in the selling price will result in a 25 % increase in the number of burgers sold each month. Find the present and proposed net operating income for the month. Is this change favorable for the restaurant? Explain the fact with working. Marks: 5+5+5 = 15

Solution:
Before reduction in sale price the net operating income is as under
Sales = 8,000 burgers
Selling price per unit= Rs.90
Total sales= 8000 * 90
= Rs.720000
Variable cost = Rs.63 per burger
Total variable cost= 8000 * 63
= Rs.504000
Fixed cost =Rs.135000
Operating income/profit = total sales- variable cost- fixed cost- other operating expense
= 720000 - 504000 - 135000 - 0
=Rs.81000

After 10% reduction in selling price and 25% increase in sales the net operating income is as under
Increase in Sales = 8,000 + 8,000 * 25%
Sales= 8,000 + 2,000
Sales= 10,000 burgers
Variable cost = Rs.63 per burger
Selling price = 90 – 90* 10%
Selling price= Rs.81
Total sales with new selling price= 10,000* 81
= Rs.810000
Total variable cost = 10,000 * 63
=Rs.630000
Total fixed cost =Rs.135000
Operating income/profit = total sales- variable cost- fixed cost- other operating expense
= 810000 - 630000 - 135000 – 0
= Rs.45000
Facts and decision
Before change in price and volume CM
Contribution Margin = Rs.720000 - Rs.504000
= 216000
After change in price and volume CM
Contribution Margin= Rs.810000 - Rs.630000
= Rs.180000
The above calculation shows that decrease in sales price by 10% per unit causes a decrease of Rs. 36000 in the contribution margin that means restaurant have low rupees to meet fixed cost which results low profit once fixed cost has been met.
Hence this change is not workable for the restaurant.

4. How many burgers would have to be sold at the new selling price (calculated above) to yield a minimum net operating income of Rs. 72,000 per month? Marks: 05

Given:
Sales = 8,000 burgers
Selling price per unit= Rs.81
Variable cost= Rs.63 per burger
Contribution margin= 81 – 63
= Rs.18 per unit
Target operating income= Rs.72,000
Fixed cost = Rs.135000
Target contribution = Target operating income + Fixed cost
= 72000 + 135000
= Rs.207000`
Target units to earn 72000 operating income= Target contribution margin / Contribution margin per unit
= 207000 / 18
= 11,500 burgers
Check
Sales (11,500 * 81) = Rs.93,1500
Less variable cost (11,500*63) = Rs.724500
Contribution Margin = Rs.207000
Less fixed cost = Rs.135000
Operating income/Profit =Rs.72,000

[khurram_libra]

Great work Done

[abdulsaboor]

:text-thankyouyellow: MANO