Owner Li Soo is considering franchising her Happy Noodles restaurant concept. She believes people…
Owner Li Soo is considering franchising her Happy Noodles restaurant concept. She believes people will pay $5.25 for a large bowl of noodles. Variable costs are $2.10 a bowl. Soo estimates monthly fixed costs for franchisees at $7,500.
Soo did franchise her restaurant concept. Because of Happy Noodles’ success, Value Noodles has come on the scene as a competitor. To maintain its market share, Happy Noodles will have to lower its sales price to $4.75 per bowl. At the same time, Happy Noodles hopes to increase each restaurant’s volume to 7,000 bowls per month by embarking on a marketing campaign. Each franchise will have to contribute $600 per month to cover the advertising costs. Prior to these changes, most locations were selling 6,500 bowls per month.
1. What was the average restaurant’s operating income before these changes?
2. Assuming that the price cut and advertising campaign are successful at increasing volume to the projected level, will the franchisees still earn their target profit of $7,050 per month? Show your calculations.