Chap 4 Add prob- solution

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Southern Alberta Institute of Technology **We aren't endorsed by this school
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ITSC 200
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Business
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Oct 21, 2023
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Solution Chapter 4 Additional problems Questions: Question 1 Owner Shan Lo is considering franchising her Happy Wok restaurant concept. She believes people will pay $5 for a large bowl of noodles. Variable costs are $1.50 a bowl. Lo estimates monthly fixed costs for franchisees at $8,400. Requirements 1. Use the contribution margin ratio shortcut approach to find a franchisee's break-even sales in dollars. 2. Is franchising a good idea for Lo if franchisees want a minimum monthly operating income of $8,750 and Lo believes that most locations could generate $25,000 in monthly sales? Solution: Req. 1 Contribution margin ratio = Contribution margin per unit Sale price per unit = $5.00 − $1.50 $5.00 = 0.70 Break-even sales in dollars = Fixed expenses + Operating income Contribution margin ratio = $8,400 + $0 0.70
= $12,000
Req. 2 If franchisees require a monthly operating income of $8,750 Target sales in dollars = Fixed expenses + Operating income Contribution margin ratio = $8,400 + $8,750 0.70 = $24,500 Yes, Lo's franchising concept is a good idea. She expects most locations could sell more ($25,000) than the sales required to earn the target profit ($24,500). Question 2: Vair's Steel Parts produces parts for the automobile industry. The company has monthly fixed expenses of $500,000 and a contribution margin of 80% of revenues. Requirements 1. Compute Vair's Steel Parts' monthly break-even sales in dollars. Use the contribution margin ratio shortcut approach. 2. Use the contribution margin ratio to project operating income (or loss) if revenues are $700,000 and if they are $1,000,000. Solution: Req. 1 Break-even sales in dollars = Fixed expenses + Operating income Contribution margin ratio = $500,000 + $0 0.80 = $625,000
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