Question
Subway, the fast food restaurant franchise, recently announced it is bringing back the $5 Footlong promotion. Hundreds of Subway franchise owners are protesting the promotion,
Subway, the fast food restaurant franchise, recently announced it is bringing back the $5 Footlong promotion. Hundreds of Subway franchise owners are protesting the promotion, saying that they cannot afford to sell the footlong sub sandwiches for $5.
Assume that the costs related to a Subway footlong and a Subway franchisee include the following:
Cost item | Details | Cost per sandwich |
Food ingredients | Per footlong | $ 2.00 |
Labor cost per footlong | Labor $14.00/hour wage rate, each worker can make 7 sandwiches per hour | 2.00 |
Credit card transaction fee | 1.0% + $0.10 per transaction | 0.15 |
Electricity | $360 per month divided by 4,000 orders per month | 0.09 |
Rent | Rent $1,200 per month divided by 4,000 orders per month | 0.30 |
Franchise fee amortization | Franchise and startup fees $36,000 divided by 180 months (15 years) divided by 4,000 orders per month | 0.05 |
Royalty fee | 8.0% of sales | 0.40 |
Advertising fee | 4.5% of sales | 0.23 |
Equipment leasing cost | $600 per month divided by 4,000 orders | 0.15 |
Cost per footlong sandwich | $ 5.37 |
Questions (Be sure to understand the following concepts before answering: (Variable Costs, Fix Costs, Mixed Costs):
- Identify each of the listed costs of one footlong sub sandwich as either variable, fixed, or mixed.
- What costs and factors do you think should be relevant to the footlong sub sandwich pricing decision? Explain.
- Do you agree that a Subway franchisee would lose money for each footlong sold for $5? Why or why not?
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