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 $1.76 per sandwich. Sandwiches sell for $2.65 each in all locations.
Rent and equipment costs would be $5,000 per month for location A, $5,500 per month for location B, and $5,800 per month for location C.
a. Determine the volume necessary at each location to realize a monthly profit of $10,000.
b. If expected sales at A, B, and C are 21,000 per month, 22,000 per month, and 23,000 per
month, respectively, which location would yield the greatest profits?

Answer 1

Genuine Subs, Inc.

a. Volume necessary at each location to realize a monthly profit of $10,000:

Locations A B C

Sales volume = 16,854 17,416 17,753

b. Location C yields the greatest profits.

Step-by-step explanation:

a) Data and Calculations:

Locations A B C

Sales per unit $2.65 $2.65 $2.65

Variable cost 1.76 1.76 1.76

Contribution $0.89 $0.89 $0.89

Fixed costs:

Rent & equipment

cost $5,000 $5,500 $5,800

Target profit = 10,000 10,000 10,000

Sales volume = (Fixed cost + Target profit)/Contribution per unit

= $15,000 $15,500 $15,800

Contribution $0.89 $0.89 $0.89

Sales volume = 16,854 17,416 17,753

Location yielding the greatest profits:

Locations A B C

Contribution $0.89 $0.89 $0.89

Expected sales units 21,000 22,000 23,000

Contribution margin $18,690 $19,580 $20,400

Rent & equipment

cost $5,000 $5,500 $5,800

Profits $13,690 $14,080 $14,600