Reference no: EM13314105
Chartwells’ Food Service provides submarine sandwiches in the food court of the Oakland Center. Recently, Chartwells’ introduced a new franchise in the food court, selling hamburgers. Total daily demand for Chartwells’ products now comprises 240 hamburgers and 800 subs. Fixed (overhead) cost at Chartwells’ is $900 per day. A Chartwells’ hamburger presently sells for $3.60, with average production cost of $3.10.
Chartwells’ accountant has determined that if the overhead costs are spread out over all the items being supplied, in a ratio proportionate to production levels, then $900/1040 yields an average fixed cost associated with each sandwich equal to $0.865. By this calculation, he argues that the hamburgers are costing the company $3.965 each, or 36.5 cents more than the current selling price of $3.60.
At a meeting with the manager, the accountant suggested raising the price of the hamburgers to $4.00 to improve the profit margin (P – AC). The manager noted that this would lead to a decline in sales, which would increase average cost even further.
Determining that she needed more data to make a decision, the manager decided to determine price and cost conditions for 4 additional production levels of hamburgers (160, 240, 320, 360 and 400). She compiled the data from her findings in the first four columns below. Taking these data and calculating average cost, based on allocating a share of the overhead costs to hamburgers, the accountant concluded that the average cost continued to exceed the price in each instance.
Manager’s Data Analysis Accountant’s Analysis
Number of
Hamburgers Price Revenue Variable
Cost Share of Total
Overhead Cost Average
Cost*
160 $4.00 $640 $664 $150.00 $5.09
240 $3.60 $864 $744 $207.69 $3.97
320 $3.20 $1024 $856 $257.14 $3.48
360 $3.00 $1080 $924 $279.31 $3.34
400 $2.80 $1120 $1000 $300.00 $3.25
Chartwells’ management retains you as a consultant to help recommend a course of action for its hamburger operation at the food court.
1. Based on the above information what would you recommend that Chartwells’ Food Service do?
a) eliminate hamburger sales altogether
b) decrease hamburger sales
c) maintain hamburger sales at current level
d) increase hamburgers
2. Explain the process by which you came to the conclusion that you did in (1) above.