The next four questions refer to a fictional fast food company: 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

What is the gross marketing contribution per unit?

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

Assume I want to become more competitive from a price perspective , and I consider lowering my prices by 15%, and I want to accompany this change with a major advertising campaign, which will cost $15,000. How must my sales change for me to preserve my contribution to the organization?

What percentage of current sales does this represent?

A Fictional Fast Food Company

a. Gross marketing contribution per unit:

= $6.80

b. 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:

= 3,677 (103,677 - 100,000) meals

c. Assume I want to become more competitive from a price perspective , and I consider lowering my prices by 15%, and I want to accompany this change with a major advertising campaign, which will cost $15,000. How must my sales change for me to preserve my contribution to the organization?

My sales must increase by 2,206 meals.

d. This represents about 2.21% increase of the current sales.

Explanation:

1) Data and Calculations:

Cost information for meals:

Food                           $2.50/meal

Franchisor Royalties $0.70/meal

Variable cost             $3.20/meal

Price of each meal  $10.00

Contribution             $6.80/meal

2) Fixed costs:

Advertising & Promotion $300,000

Rent                                   $100,000

Total fixed costs              $400,000

3) Income Statement

Sales Revenue          $1,000,000

Variable cost                  320,000

Contribution               $ 680,000

Total fixed costs            400,000

Net Income                 $280,000

4) Scenario 1:

= (Fixed costs + $25,000 + $280,000)/Contribution per unit

= $705,000/$6.80

= 103,677 meals

5) Scenario 2:

Reduced selling price = $8.50 ($10 x 0.85)

($400,000 + $15,000 + $280,000)/$6.80

= $695,000/$6.80

= 102,206

6) Percentage change:

= 102,206 -100,000 = 2,206

= 2,206/100,000 * 100

= 2.21%

answer; strategic planning;