Let us first find out the cost of serving chili by adding up number of direct and indirect costs:
Step1: Cost of Serving the customers:
Cost of bowl = $ 0.035
Cost of Lid = $0.025
Cost of Spoon = $ 0.01
Total Cost =$0.07
Step 2: Cost of the ingredients used to make 57 eight ounce servings:
Crushed Tomatoes = $2.75 (1 * $2.75)
Tomato Juice = $6.25 (5 * $1.25)
Seasoning Packet = $1.00 (1 * $1.00)
Red Beans = $4.50 (2 * $2.25)
Beef Patties = $42 (12 * $3.50)
Total Price = 55.50 $
Therefore total price of 1 eight pound serving = 55.50 / 57
= 0.98 $
Step 3: Calculation of Total Material Cost
Total material cost = (Cost of serving the customers + Cost of the ingredients used to make 57 eight ounce servings)
= 0.07 + 0.98
= $ 1.05
Step 4: Calculation of labor cost
Assistant manager cost = $10.50 per hour + 10% tax
= $11.55
Preparation time = 12.5 minutes (we take the average of 10 to 15 minutes as given)
Labor Cost = ($11.55 / 60) * 12.5
= 0.1925 * 12.5
= 2.41 $
Therefore cost of 1 eight pound serving = 2.41 / 57
= $ 0.04 per serving
Step 5: Total cost per serving of chili:
= Total material cost (from step 3) + Labor cost
= 1.05 + 0.04
= $ 1.09 per serving of chili
The total cost per serving of chili = $ 1.09
As per the question the sales of chili is $ 0.99 for an eight ounce serving of chili plus it will increase by 14% for the year 2001 (that is 1.13 $). And the total cost as calculated per serving of chili is $ 1.09. So the idea to drop chili from the menu would be wrong as the cost to prepare chili is 1.09 which is far less than the revenue generated out of the sales of the chili. Moreover the manner to prepare chili is economical as the overcooked patties are used for the preparation. This results into low cost involvement without any wastage of left over patties and plus an additional item in the menu. On the contrary if the chili would be dropped from the menu then it won’t be able to generate enough revenue even by increasing the sales of hamburger or by adding some alternate food item in the menu. Above all removing chili would shatter the loyalty of the customers and make them feel dissatisfied as a result they would discontinue their purchases and hence less revenue generation.
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