case study

Burger King Dollar Double Cheeseburgers Recently, the National Franchise Association {NFA} filed a lawsuit against Burger King Corporation (BKC) over the pricing of products on its value menu. and specifically its $1 double cheeseburger promotion. The NFA is group that represents more than 80% of Burger King Franchise owners. Here are excerpts from the Associated Pressl report on the case: The National Franchise Association, a group that represents rrrore than 80 percent of Burger King's U.S. franchise owners, said the $1 promotion forces restaurant owners to sell the quarter-pound burger with a least a ill-cent loss. While costs vary by location. the $1 double cheeseburger typically costs franchisees at least $1.10, said Dan Fitzpatrick. a Burger King franchisee from South Bend. Ind. who is a spokesman for the association. That includes about 55 cents for the cost of the meat, bun, cheese and toppings. The remainder typically covers expenses such as rent, royalties and worker wages. "New math, or old math, the math just doesn't work.\" Fitzpatrick said. Burger King justified the move by stating that the company needs to remain competitive in a tough economic environment: Restaurants, especially fast-food chains, have been slashing menu prices because of the poor economy. Executives hope the deeply discounted deals will bring in diners who are spending less when they eat out, or opting to stay home altogether. When the$l double cheeseburger was announced this fall, analysts said it could increase restaurant visits by as rtmch as 20 percent. But despite that boost, a Deutsche Bank anaiyst said as much as half of the gain recorded from increased traffic could be lost because customers were spending less when they ordered food. Burger King Franchisees pay a royalty to Burger King that is typically equal to 4.5% of revenues for the store. The law-suit alleges that thevalue menu restriction illegally sets a maximum price forthe Burger King franchises. and that Burger King is not acting in \"good faith\" by forcing franchises to sell a product below its cost. The case was filed in U.S. District Court in South Florida. Now. you are required to answer the following questions: 1. 2. 3. As \"experts in managerial economics", do you support the idea that Burger King franchises are losing tnoney by selling $1 double cheeseburgers? What are the relevant costs to a franchise of selling a double cheeseburger? What other factors need to be considered in making this decision? 1 'Food Fid'rt: Burger King Franchisees sue chahoverSi burger promothn'Ashley M. Heher. Associated Frail. USA Today.Nov. I2, 2009. 4. 5. 6. 1 Is there an opportunity cost that needs to be factored in? What is the goal of a Burger King franchise? What is the goal of Burger King Corporate? So it seems that the fundamental problem is that incentives are misaligned. Can this be resolved