Owner Kay Fay is considering franchising her Noodles Galore restaurant concept. She believes…
Owner Kay Fay is considering franchising her Noodles Galore restaurant concept. She believes people will pay $6.25 for a large bowl of noodles. Variable costs are $2.50 a bowl. Fay estimates monthly fixed costs for franchisees at $8,250.
Since franchising Noodles Galore, the restaurant has not been very successful due to Noodles Unlimited coming on the scene as a competitor. To increase its market share, Noodles Galore will have to lower its sales price to $5.75 per bowl. At the same time, Noodles Galore hopes to increase each restaurant’s volume to 6,000 bowls per month by embarking on a marketing campaign. Each franchise will have to contribute $500 per month to cover the advertising costs. Prior to these changes, most locations were selling 5,500 bowls per month.
1. What was the average restaurant’s operating income before these changes?
2. Assuming the price cut and advertising campaign are successful at increasing volume to the projected level, will the franchisees earn their target profit of $6,600 per month?