CASE INFORMATION Schlotzskys, an upscale sandwich restaurant, has recently released financial information relating to franchise store opportunities. The estimated fixed acquisition cost of the franchise would be $300,000. The following revenue and expense estimates for a new franchise store, annually, would be: ($000s) Sales1,500 Ingredients375 Crew Labor (hourly)345 Management and Other Store Overhead Costs (fixed)195 Advertising (fixed)75 Product Discounts (variable in proportion to Sales revenue)60 Facility rent and property tax150

Schlotzskys charges a royalty fee (which represents a cost in addition to the costs listed above) of 5% of sales over and above the breakeven level of sales. A typical Schlotzskys store has on average 55 employees and about 3,700 square feet of floorspace. In a recent readers' poll, Schlotzskys was named by loyal customers as "Best Lunch Hour Spot" for its swift service and good group accommodations, and "Best Restaurant for Kids" for its nutritious food and, in many cases, "cyber-deli" counters. In the Schlotzkys stores that contain the "cyber-deli" counters, customers can surf iMacs and flat-screen PCs with Internet access. Customers can e-mail friends, catch up on the nation's top news headlines, and play computer games without charge. Schlotzkys CEO has been quoted as saying, We think this is the restaurant playground of the future. Estimates of the incremental costs and sales of outfitting stores with cyber-deli counters are as follows:

Desktop Computer, including installation costs$2,000each, annually Internet costs (irrespective of the number of connections)$100 monthly Total incremental sales attributable to cyber-deli for 1 desktop$12,000annually Total incremental sales attributable to cyber-deli for 2 desktops$17,000annually Total incremental sales attributable to cyber-deli for 3 desktops $14,000annually

A potential franchisee, Ozzie.com, manufactures supply packages used for integrating consumer home theater, audio, computer, and security systems. The company wants to diversify its business and is considering, as a first step in a larger plan, the acquisition of a Schlotzskys franchise store. Make the following assumptions, where applicable, in preparing any quantitative analyses: The franchise acquisition costs should be depreciated on a straight-line basis over ten years. Income taxes should be ignored.

You must clearly justify any other assumptions that you believe you need to make.