Compute incremental profit with fixed retainers

Q: Compute incremental profit with fixed retainers

This question evaluates financial modeling and quantitative analysis skills, focusing on incremental profit computation, cost classification (fixed versus variable), pro-rating periodic costs, and basic sensitivity analysis.

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Question

Incremental Operating Profit — Vegan Burger (Year 1)

Assume m = million. You are evaluating the Year 1 incremental operating profit from launching a vegan burger. Treat all amounts as operating (pre-tax) and compare against the baseline of not launching (i.e., zero revenue and zero cost).

Given:

Selling price: $5 per burger
Expected Year 1 revenue: $120m
Variable cost: $2 per burger (vegan ingredients)
Fixed costs:
- Training: $60m per year
- Vegan supplier retainer: $2.25m per month (pro-rate to Year 1)

Tasks:

Compute the Year 1 incremental operating profit versus not launching, clearly separating fixed vs. variable components and pro-rating monthly costs to annual.
If revenue is ±10% versus plan, compute the new incremental profit in each case.

Compute incremental profit with fixed retainers

Incremental Operating Profit — Vegan Burger (Year 1)

Solution

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Compute incremental profit with fixed retainers

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Incremental Operating Profit — Vegan Burger (Year 1)

Solution

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