Answer:
A Fictional Fast Food Company
a. Gross marketing contribution per unit:
= $6.80
b. If the company sold 100,000 meals and decided that they wanted to increase the advertising expense by $25,000 to generate more sales, how many more meals would they have to sell to maintain their current contribution to the organization:
= 3,677 (103,677 - 100,000) meals
c. Assume I want to become more competitive from a price perspective , and I consider lowering my prices by 15%, and I want to accompany this change with a major advertising campaign, which will cost $15,000. How must my sales change for me to preserve my contribution to the organization?
My sales must increase by 2,206 meals.
d. This represents about 2.21% increase of the current sales.
Explanation:
1) Data and Calculations:
Cost information for meals:
Food $2.50/meal
Franchisor Royalties $0.70/meal
Variable cost $3.20/meal
Price of each meal $10.00
Contribution $6.80/meal
2) Fixed costs:
Advertising & Promotion $300,000
Rent $100,000
Total fixed costs $400,000
3) Income Statement
Sales Revenue $1,000,000
Variable cost 320,000
Contribution $ 680,000
Total fixed costs 400,000
Net Income $280,000
4) Scenario 1:
= (Fixed costs + $25,000 + $280,000)/Contribution per unit
= $705,000/$6.80
= 103,677 meals
5) Scenario 2:
Reduced selling price = $8.50 ($10 x 0.85)
($400,000 + $15,000 + $280,000)/$6.80
= $695,000/$6.80
= 102,206
6) Percentage change:
= 102,206 -100,000 = 2,206
= 2,206/100,000 * 100
= 2.21%
