Question

Jone’s Burger is a very popular lunch time spot and has a large seating capacity of 700 seats.   It often boasts a lunchtime crowds of 600 customers for Jone’s Lunch Special for $5.00. Joan Jones the owner has roughly calculated the costs on a daily basis, fixed costs $1200, and variable costs to be $2 per lunch meal.

Jone’s Burgers is also a popular spot for bus-tours. On average, the bus tours would have 50 customers stop-by. Joan welcomes the bus-tours as the establishment can easily the additional customers. The bus tour operators pay for the entire group and does not increase any fixed costs. As tours have become less frequent due to added competition, the tour operators are requesting that the lunch price be reduced to $3.50 for each of the 50 customers on the bus.

Required:

1. What is the incremental profit (loss) per bus-tour meal? Should Joan accept the new tour operator request? Provide your rationale.

2. What if the tour operator could generate 200 customers (4 bus loads) once a month for $3.00 per meal? What is the incremental profit (loss) for each meal? What advice would you give to Joan – is this something she should consider?

Answer 1

Ans-(a)

Sale Price per meal - $ 5

Variable Cost per meal - $ 2

Contribution per meal - (5 -2) or $ 3

Since additional 50 customers from each BusTour donot add any Fixed costs hence the whole contribution is incremental profit =

3 * 50 = 150

Even if the operator's request is accepted Joan will be making a profit of $ 1.70 i.e ( 3.70 - 2) and a total additional profit of 1.70*50 or 85 per Bus Tour.Hence proposal can be accepted.Moreso there is excess capacity of 100 which shall get utilized by 50%.

Ans-(b)

If the price is dropped to $ 3 then the contribution per mean will be $ 1 i.e. (3-2).

There is still additional profit of 1*200 or $ 200 and hence this should be acceptable specially when there is excess capacity available each time (100 vacant seats for 50 Bus Tour Customers)