the Eastpointe Café’s average lunch sells for $12, while its variable costs per
ID: 2420428 • Letter: T
Question
the Eastpointe Café’s average lunch sells for $12, while its variable costs per lunch average $8.00. It plans to advertise a Monday lunch special for $11. The special would cost Eastpointe $7.75 per meal (variable costs). An ad in the local paper to promote the special would cost Eastpointe $200.
Required:
1.What are the café’s contribution margin (CM) and contribution margin ratio (CMR) to begin with?
2.What are the CM and CMR based strictly on the lunch special–related price and cost?
3.How many lunch covers must be sold to cover the promotion of the luncheon special?
Explanation / Answer
Answer (1)
Contribution Margin Ratio ( CMR ) = Contribution Margin (CM) / Selling Price * 100
= $4/$12 *100
=33.33%
Answer no. (2)
Contribution Margin Ratio ( CMR) =Contribution Margin (CM) / Selling Price * 100
= $3.25 / $11 *100
=29.50 %
Answer (3)
Fixed Promotion Expense = $200
Contribution margin of Lunch Special = $3.25
Break Even Point = Fixed cost / Contribution margin = $200 / $3.25 = 61.54 = 62 lunch ( rounded off )
Hence ,
62 lunch cover must be sold to cover the promotion of Lunch on Special.
Selling Price per lunch $12 Less: Variable cost per Lunch $8 Contribution Margin (CM) $4Related Questions
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