Before franchising her Noodle Time restaurant concept, owner Yang Wong had made the following assumptions.
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Requirement 1. What was the average restaurant's operating income before these changes?
Identify the formula labels and compute the operating income before the changes
Contribution margin per unit
Times: Average sales volume units
Contribution margin
6.50
Less:
Fixed expenses
Operating income
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Wong believed people would pay $6.50 for a large bowl of noodles. Variable costs
would be $1.95 a bowl creating a contribution margin of $4.55 per bowl
Yang Wong estimated monthly fixed costs for franchisees at $8,400. Franchisees
wanted a minimum monthly operating income of $7,000
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Wong did franchise her restaurant concept. Because of Noodle Time's success,
Noodles 'n More has come on the scene as a competitor. To maintain its
market share, Noodle Time will have to lower its sales price to $6.00 per bowl. All
the same time, Noodle Time hopes to increase each restaurant's volume to 6,000
bowls per month by embarking on a marketing campaign. Each franchise will have
to contribute $500 per month to cover the advertising costs. Prior to
these changes, most locations were selling 5,500 bowls per month
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