Question

Barry’s Bar-B-Que is a popular lunch-time spot. Barry is conscientious about the quality of his meals, and he has a regular crowd of 400 patrons for his $10.70 lunch. His variable cost for each meal is about $3.30, and he figures his fixed costs, on a daily basis, at about $2,500. From time to time, bus tour groups with 50 patrons stop by. He has welcomed them since he has capacity to seat 500 diners in the average lunch period, and his cooking and wait staff can easily handle the additional load. The tour operator generally pays for the entire group on a single check to save the wait staff and cashier the additional time. Due to competitive conditions in the tour business, the operator is now asking Barry to lower the price to $4.80 per meal for each of the 50 bus tour members. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

Required:

1. What is the net benefit (cost) per meal if Barry accepts the $4.80 price?

2. What is the net benefit (cost) per meal if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $4.10 per meal?

Answer 1

Total Cost for each meal = $ 3.30 + (2500/400 ) = $9.55

Margin = $ 10.70 - $ 9.55 = $ 1.15

In long term pricing and competitive condition Barry's Bar-B-Queshould be willing to do business as long as the negotiate price is greater than the variabl cost of $ 3.30 per meal.Fixed costs are irrelevant and are unaffected by additional sales.

2. What is the net benefit (cost) per meal if the tour company were willing to guarantee 200 patrons (or four bus loads) at least once a month for $4.10 per meal?