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Li Wang is the owner of Lots A Noodles restaurant. She is considering franchising her restaurant concept. Wang believes that people will pay $5.25 for a large bowl of noodles. Variable costs are $2.10 a bowl. Wang estimates that the fixed costs for franchisees would be $7,500 per month.

Worth 19.5 total pts. (15 regular pts. plus 4.5 extra credit pts.)

REQUIREMENTS (Show all calculations for credit):

Part 1:

1. Determine what a franchisee’s breakeven point would be in units. Round up units to the next whole number. (Worth 1.5 pts.)

2. Determine what a franchisee’s breakeven point would be in sales dollars. Round answers to the appropriate whole dollar amount. (Worth 1 pt.)

3. Do you think franchising is a good idea for Li Wang if franchisees want a minimum monthly operating income of $7,050. Wang believes that most locations for her franchisees would generate $25,000 in monthly sales. (Worth 4 pts.)

Part 2:

Assume Li Wang does franchise her restaurant concept. Because of Lots a Noodles’ success, a competitor has come into the market with a similar restaurant concept named Unlimited Noodles. In order to maintain its market share, Lots A Noodles will have to lower it sales price to $4.75 per bowl. At the same time, Lots A Noodles hopes to increase each restaurant’s volume of sales to 7,000 bowls per month by implementing a marketing advertising campaign. Each franchise will have to contribute $600 per month to cover the additional advertising costs for this campaign. Prior to these changes, most locations were selling 6,500 bowls per month.

4. What was the average restaurant’s operating income before these changes? (Worth 2.5 pts.)

5. Assuming that the price cut and advertising campaign are successful at increasing sales volume to the projected level, by what amount will net operating income increase or decrease each month? (Worth 3.0 pts.)

6. Assume that the price cut and advertising campaign are only partially successful at increasing the volume of sales. If the franchisees sales volume only increased by an additional 200 bowls (6,700 bowls), will the franchisee still earn their target profit of $7,050 each month? (Worth 3.0 pts)

7. If Li Wang implements the changes indicated in Part 2 above, what is the new breakeven point in units? Round up units to the next whole number. (Worth 1.5 pts)

8. What is the new breakeven point in sales dollars? (Worth 1 pt.)

9. Why did the breakeven point increase in Part 2 in relationship to Part 1? (Worth 2 pts.)

 

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