Essentials of Management - Case Study Example

At break-even point, the total cost = the total revenue. BEP= (Fixed cost/Contribution). The average contribution ration for four products is (0.15*0.5) + (0.5*0.25) + (0.1*0.5) + (0.25*0.8) = 0.45. The break-even sales in this case = (1,053,000/0.45) = $ 2,340,000. However, the level of sales necessary to achieve the target net income of $ 117,000 = (1,053,000 + 117,000) /0.45 = $ 2,600,000. Sales for each product lines are as follows: appetizers = (2,600,000 * 0.15) = $ 390,000; Main entrees = (2,600,000 * 0.5) = $ 1,300,000; Desserts = (2,600,000 * 0.1) = $ 260,000; and Beverages = (2,600,000 * 0.25) = $ 650,000 (DuBrin 208-212).

The proposed change of strategy has the following consequences: the fixed costs will increase to (1,053,000 + 585,000) = $ 1,638,000. Second, the new average contribution margin = (0.25*0.5) + (0.25*0.1) + (0.1 * 0.5) + (0.4 * 0.8) = 0.52. Therefore, the total restaurant sales to achieve the desired net income = (1,053,000 + 585,000 + 117,000) /0.52 = $ 3,375,000. Sales for each product lines are as follows: appetizers = (3,375,000 * 0.25) = $ 843,750; Main entrees = (3,375,000 * 0.25) = $ 843,750; Desserts = (3,375,000 * 0.1) = $ 337,500; and Beverages = (3,375,000 * 0.4) = $ 1,350,000 (DuBrin 208-212).

The fixed cost will be $ 1,638,000. However, the new contribution margin = (0.15 * 0.5) + (0.5 * 0.1) + (0.1 * 0.5) + (0.25 *0. 8) = 0.375. The sales level to achieve the desired net income = (1,053,000 + 585,000 + 117,000) /0.375 = $ 4,680,000. Sales for each product lines are as follows: appetizers = (4,680,000 * 0.15) = $ 702,000; Main entrees = (4,680,000 * 0.5) = $ 2,340,000; Desserts = (4,680,000 * 0.1) = $ 468,000; and Beverages = (4,680,000 * 0.25) = $ 1,170,000 (DuBrin 208-212). Changing from manual labor production system to an automated equipment system changes the cost above named costs pools thus a company’s cost structure.