Special Order Pricing Barry’s Bar-B-Que is a popular lunch-time spot. Barry is c

Question

Special Order Pricing Barry’s Bar-B-Que is a popular lunch-time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 500 patrons for his $9.40 lunch. His variable cost for each meal is about $3.00, and he figures his fixed costs, on a daily basis, at about $2,200. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat 600 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $4.50 per meal for each of the 50 bus tour members. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Required: 1-a. What is the net benefit (cost) if Barry accept the $4.50 price?

What is the net benefit (cost) if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $4.30 per meal?

Explanation / Answer

Answer: 1

a) Barry has a regular crowd of 500 patrons and he has a capacity for 600 seats. It implies Barry has an excess capacity of 100 patrons. Therefore, Barry can easily handle the extra load of patrons upto 100 patrons. There would be no incremental fixed cost as there is excess capacity. Only variable cost would be considered.

Calculation of Net benefit (cost):

Sales revenue ( 50 patrons * $4.50 per meal) = $225

Less: Variable cost (50 patrons *$ 3 per meal)= $150

Net benefit = $75

b) Yes, Barry should accept the order as it gives an additional revenue of $1.50 ($4.50 - $3) per meal.

Answer: 2

a) Here, the special order is exceeding the Barry's capacity by 100 patrons (500 regular patrons + 200 special order patrons - 600 capacity).

Here, we will have to calculate the opportunity cost of 100 meals. Since 100 patrons are extra, there will be a loss of 100 meals to regular customers.

Opportunity cost :

No. of units of lost sales = 100 units

CM per unit- regular sales ($9.40 sales price/unit - $3 variable cost/unit) = $6.40

Total opportunity cost (no. of units of lost sales * CM per unit) = $640

Calculation of Net Benefit (cost) due to loss of 100 meals to customers:

Revenue (100 meals * $4.30 per meal) = $430

Less: Variable cost (100 meals *$3 per meal) = ($300)

Contribution margin on 100 meals lost to regualr customers = $130

Less: opportunity cost = ($640)

Impact on net benefit( cost) = ($510)

It implies net benefit is decreasing by $510 if the special order to serve 200 patrons is accepted.

b) Barry should not accept the order at this price because it is less than the minimum acceptable price.

Calculation of minimum acceptable price:

Opportunity cost = $640

No. of units in the special order = 200 patrons

Opportunity cost per unit of special order ($640/200) =$3.20

Add: Variable cost per meal = $3

Minimum acceptable price = $6.20

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