Question

The following cost information pertains to the meals made by the company:

Food                                        $2.50/meal

Franchisor Royalties               $0.70/meal

Advertising & Promotion        $300,000

Rent                                         $100,000

Price of each meal                  $10.00

If the company sold 100,000 meals and decided that they wanted to increase the advertising expense by $25,000 to generate more sales, how many more meals would they have to sell to maintain their current contribution to the organization

Answer 1

1st we have to calculate current contribution to the organisation as follows:

Particulars	Amount
Revenue from slae of meals($10*1,00,000) (A)	$1,000,000
Costs/Expenses:
Food($2.5*1,00,000)	$250,000
Franchisor Royalties($0.70*1,00,000)	$70,000
Advertising & Promotion	$300,000
Rent	$100,000
Total Costs(B)	$720,000
Contribution to organization(A-B)	$280,000

Increase of advertising expenses by $25,000

Advertising & promotion and Rent expenses =$300,000+$25,000+$100,000=$425,000

Let us assume number of meals as "X"

$425,000+$280,000=X*$10-X*$2.5-X*$0.70

$6.80X=$705,000

X=$705,000/$6.80=103676.47 units

additional number of meals=103676.47-100000=3676.47 or 3676

So 3676.47 or 3676 more meals are required to sell to maintain current contribution to the organisation