innovation challenges loom.

Since 2008, the 44 000-location Subway restaurant chain has done big business with the success of

its $5 foot-long sandwich deal. Heavily advertised, the promotion lowered the price of many

sandwiches, which attracted customers in droves and helped Subway to significantly boost profits.

Since introducing $5 foot-long sandwiches, Subway has sold billions of the sandwiches worldwide.

How did Subway lower prices and boost profits, you may ask? Through higher volume and

incremental sales of other items. When the price of foot-long sandwiches was lowered to $5, the

contribution margin per sandwich dropped but customers flocked to Subway and sales increased

rapidly, increasing total contribution margin. At least two-thirds of Subway customers purchase

potato chips or a soft drink with their sandwich. Subway's contribution margin on these items is very

high, frequently as high as 70%. As the number of customers increased, the total contribution margin

from these other items also increased. Fixed costs increased but the increases in contribution margin

resulted in big increases in operating income. But Subway faces challenges going forward. Its rapid

sales growth has slowed as customer preferences have changed, and competitors from McDonalds to

Firehouse Subs, Jimmy John's and Jersey Mike's have begun offering healthier menu options. If

Subway is to continue to grow, it needs to get closer to its customers and continue to innovate its

product offerings and its marketing.

Required:Explain how Cost Volume Profit Analysis can help Subway improve its profitability. Use appropriate references to support your arguments