Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 91

CVP application—determine offering price Tommy Appleton is in charge of arranging the “attitude adjustment” period and dinner for the monthly meetings of the local chapter of the Management Accountants Association. Tommy is negotiating with a new restaurant that would like to have the group’s business, and Tommy wants to apply some of the cost-volume-profit analysis concepts he has learned. The restaurant is proposing its regular menu prices of $4.00 for a before-dinner drink and $22.00 for dinner. Tommy has determined that on average, the people attending the meeting have 1.5 drinks before dinner. He also believes that the contribution margin ratios for the drinks and dinner are 50% and 40%, respectively.

Required:

Prepare a memo to Tommy outlining the possible offers he might make to the restaurant owner, and recommend which offer he should make.

Step 1 of 3

Calculate contribution margin for drinks and dinner

The contribution margin per drink is $3 and per dinner is $8.8. It is to be noted that the drink’s contribution margin is for every 1.5 times quantity of regular drink, as each person attending the meeting would have 1.5 drinks before dinner.