A math question, please help out!

Question

Dear all, I believe this is a very simple math question to all of you, but I still don't know if I did it correctly. Can you help to take a quick look?

A burger company is planning to do a promotion. They will add free fries to each burger order. They want to know how many extra burgers they need to sell to make this promotion profitable. they currently sell 10,000 burgers each day. burgers are $5 each, and costs are $ 2 each. Fries are $2 each, costs are $0.5 each. 40% burger orders include fries.

This is how I did.

1. Find out current profit - 10,000*3 + 4000*1.5= 36,000

2. To make the promotion profitable, which means the profit should be higher than 36,000. Suppose we need to sell additional x burgers. (10,000+x)*5 - (10,000+x)*2.5= 36,000 x=4400

so, they should sell 4400 more burgers.

Is this correct? I know the formula for break even unit is: breakeven units= fixed cost/contribution margin. In this case, what's the fixed cost? Thanks!

Answer 1

Hi there,

I would be happy to share my thoughts on it:

Yes, your calculation is correct.
Generally speaking, with promotions, you first need to understand current profitability level, adjust the profitability formula for the promotion, and solve for the new volume.
Lastly, in this situation, while there are no fixed costs indicated, typical fixed costs for a burger company would be rent or depreciation on real estate, personnel costs, depreciation and amortization expenses for equipment, furniture, and fixtures, marketing and advertising costs aso.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

Answer 2

Hi there,

Your calculation looks correct. You correctly found the current profit per day and then found the number of extra burgers they need to sell to make the promotion profitable.

In this case, the fixed cost would be the cost of running the burger company, such as rent, salaries, utilities, etc. However, the question doesn't provide this information, so we cannot calculate the exact fixed cost.

If you had the fixed cost information, you could use the formula you mentioned to find the breakeven units:

breakeven units = fixed cost / contribution margin

where the contribution margin is the difference between the price and variable cost per unit. In this case, the contribution margin per burger is $5 - $2 = $3, and the contribution margin per order with fries is $7 - $2.5 = $4.5.

Hope this helps!

Best,

Cristian

Answer 3

Hi there,

1) Is this correct?

Yes, good job! The steps can be summarized as follows:

1) Calculate current profits

Current profits from Burgers: 10k*3 = 30k
Current profits from Fries: 4k*1,5 = 6k
Total: 36k

2) Calculate burgers to match current profits

New margin for burgers: 2.5 (5-2-0,5)
Burgers to match current profits: 36k/2.5 = 14.400

3) Calculate the difference

Extra burgers = 4.400

2) I know the formula for break even unit is: breakeven units= fixed cost/contribution margin. In this case, what's the fixed cost? Thanks!

In this case there is no fixed cost. Given you want to do more than current profits (instead of more than fixed cost), the numerator in the formula is the old profit amount.

Best,

Francesco

Answer 4

Hi,

I’m sorry but this calculation is not correct. You need to subtract out the losses from offering our existing fries sales for free.

You need 6,000 burger sales not 4,400.

Let's break it down step by step.

Find out lost profit from offering fries:

Current fries profit: 40% of burger orders include fries, so 0.4 * 10,000 = 4,000 orders. Profit from these orders is 4,000 * ($2 - $0.5) = 4,000 * $1.5 = $6,000 lost profits from offering fries for free
Adding fries to existing orders cost: 10,000 *.6 = 6000 orders at a cost of $.5 need to be added to all current orders. That costs us $3,000 in extra costs

To make the promotion profitable, we need to make more than $9,000 in new profits from additional burger sales.

Find out burgers needed

Each new burger sale brings $5 in revenue - $3 burger cost - $.5 fries cost = $1.5 profit per burger.

$9,000 = $1.5 x Number of Burgers

6,000 = Extra Burgers Needed

Answer 5

There's no fixed cost here.

Current profit: you got it right ($36000)

New margin of the bundle: $2.5

To make $36000 you need to sell $2.5 * X bundles. So

36000 = 2.5X

X = 14400.

That's 4400 more than what you sell right now.

Answer 6

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