Owner Shan Lois considering franchising her Noodles for a restaurant concept. She believes people will pay

$ 10.50 for a large bowl of noodles. Variable costs are $ 6.30 per bowl. Lo estimates monthly fixed costs for a franchise at $10,500.

Requirements

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

2. Lo believes most locations could generate $63,000

in monthly sales. Is franchising a good idea for

Lo if franchisees want a minimum monthly operating income of

13,500 ?

a) Break-even sales (BEP) = $15,750

b) Yes, the franchise is good because the $63,000 sales that be generated by most locations is higher than the minimum sales revenue of $36,000 required to achieve the the target profit

Explanation:

a)

Contribution margin ratio = (sales-variable cost/sale) * 100

Break - even sales (BEP) = Fixed cost/Contribution margin ratio

CMR = (10.50 - 6.30) / 6.30 = 66.7%

BEP = 10,500/66.7% = $15,750

b)

To generate a minimum operating income of $13,500, the franchisee will need to make sales worth:

Sales revenue to achieve pre-determined income = (Fixed cost + Target income) / CMR

= (10,500. + 13,500) / 0.667

= $36,000

Yes the franchise is good because the $63,000 sales that be generated by most locations is higher than the minimum sales revenue of $36,000 required to achieve the the target profit