Owner Shan Lo 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. Lo estimates monthly fixed costs for franchisees at $ 8 comma 750.

Requirements

1. Use the contribution margin ratio approach to find afranchise's breakeven sales in dollars.

2. Lo believes most locations could generate $63,000 in monthly sales. Is franchising a good idea for Lo if franchisees want a minimum monthly operating income of 13,500?

Instructions are below.

Explanation:

Giving the following information:

Selling price= $5.50 for a large bowl of noodles.

Variable costs are $2.75 a bowl.

Fixed costs= $8,750.

To calculate the break-even point in dollars, we need to use the following formula:

Break-even point (dollars)= fixed costs/ contribution margin ratio

Break-even point (dollars)= 8,750/ [(5.5 - 2.75)/5.5]

Break-even point (dollars)= $17,500

2)

First, we need to determine the contribution margin:

Contribution margin= sales* contribution margin ratio

Contribution margin= 63,000*0.5= 31,500

Fixed costs= (8,750)

Net operating income= 22,750

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