CVP analysis; sales mix
Half-Time Pty Ltd currently sells hotdogs at the local cricket grounds. In a typical summer month, the stall reports a profit of $13 500 with sales of $75 000, fixed cost totalling $31 500. The variable cost of each hotdog is $0.96.
John, the proprietor, plans to start selling wedges with chilli and sour cream dipping for $7 each. The variable cost of each serve of wedges is $2.28 and a new fryer as well as another staff member to help cook the wedges will increase monthly fixed costs by $13 212. Initial sales of wedges are expected to be 7500 serves. Some of the wedges sales will come from current hotdog purchasers; thus, John expects monthly hotdogs sales (at current price) to decline to $45 000. After six months of selling wedges, John believes that hotdogs sales will start to increase again.
Required:
1.Given John's estimate of wedges and hotdogs sales once wedges are added to the menu, what is the estimated monthly profit assuming his estimates are realised? Should John go ahead with the plan to also sell wedges? What other factors should John consider in deciding whether to go ahead with the plan to sell wedges?