Question

The owner of Genuine Subs, Inc., hopes to expand the present operation by adding one new outlet. She has studied three locations. Each would have the same labor and materials costs (food, serving containers, napkins, etc.) of $2.70 per sandwich. Sandwiches sell for $3.50 each in all locations. Rent and equipment costs would be $5,800 per month for location A, $5,900 per month for location

Answer 1

The main answer is that economies of scale should be considered when deciding on the location for a new outlet of Genuine Subs, Inc. The break-even point and expected sales volume would determine the location's profitability. Lower average costs are beneficial up to a point where the economies of scale threshold is reached.

Step-by-step explanation:

The main answer to the student's question focuses on economies of scale in selecting a location for a new outlet for Genuine Subs, Inc. The cost per sandwich at any location would be $2.70, with a selling price of $3.50. However, the monthly rent and equipment costs vary between the locations, potentially affecting the overall profitability. To determine which location is most economically advantageous, we need to consider the break-even point and the expected volume of sales.An explanation in more than 100 words of how economies of scale apply here can be drawn from the given figures indicating that production plants achieve lower average costs of production as output increases, up to a certain point. Assuming that each new outlet may also achieve economies of scale up to a point where increasing scale does not lead to lower average costs, the ideal location would be one where the outlet can operate efficiently without exceeding the economies of scale threshold.In conclusion, while rent and equipment costs are important to consider, the decision should also factor in potential sales volume and whether economies of scale can be achieved without incurring additional average costs.