Owner Kay Fay is considering franchising her Oriental Express restaurant concept

Question

Owner Kay Fay is considering franchising her Oriental Express restaurant concept. She believes people will pay $5.50 for a large bowl of noodles. Variable costs are $2.75 a bowl. Fay estimates monthly fixed costs for franchisees at $8,750. 1. Use the contribution margin ratio shortcut approach to find franchisees breakeven sales in dollars. 2. Is franchising a good idea for Fay if franchisees want a minimum monthly operating income of $3,500 and Fay believes most locations could generate $24,000 in monthly sales?

Explanation / Answer

contribution margin for 1 bowl is 5.5 - 2.75 = 2.75

breakeven sales is 8750 / 2.75 = 3181.81 =~ 3182

2) 24000 thousand in monthly sales means 12000 in monthly profit as contribution margin is 2.75/5.5 = 50%

Profit after fixed costs is 12000 - 8750 = 3250

Hence they cant get the sales of $3500 as 3250 < 3500 and hence frachising is not a good idea

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