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 B, and $6,150 per month for location C.

a. Determine the volume necessary at each location to realize a monthly profit of $12,000.



b-1. If expected sales at A, B, and C are 23,000 per month, 26,000 per month, and 25,000 per month, respectively, calculate the profit of the each locations?



b-2. Which location would yield the greatest profits?

Answer 1

Genuine Subs, Inc. Profit-Volume Analysis:

Contribution Margin for all three locations = $3.50 - $2.70 = $0.80

Fixed Costs:

A - $5,800

B - $5,900

c - $6,150

Expected profit = $12,000

a) Volume necessary to realize a monthly profit of $12,000 at each location:

Breakeven Volume + Target Profit = (Fixed Cost + Profit) / contribution margin

A = (5,800 + 12,000) / 0.80 = 22,250 units

B = (5,900 + 12,000) / 0.80 = 22,375 units

C = (6,150 + 12,000) / 0.80 = 22,688 units

b-1) Profit Calculation with given expected sales =

Sales volume by sales price minus Variable cost plus Fixed cost or Sales Volume by contribution minus fixed cost

A = 23,000 x $0.80 - $5,800 = $12,600

B = 26,000 x $0.80 - $5,900 = $14,900

C = 25,000 x $0.80 - $6,150 = $13,850

b-2) Location B would yield the greatest profits of $14,900.

Step-by-step explanation:

a) The break even point plus target profit is the volume of sales needed to cover fixed costs and make a target profit.

To calculate break even point plus target profit, the fixed cost is divided by the contribution per unit. Contribution per unit or the Contribution margin is the difference between sales price and variable cost.

b) Profit is the difference between sales value and cost of sales. Cost of sales is made up of variable cost and fixed cost.

c) The location that yields the greatest profits is determined by calculating the profits which would be made at each location and comparing them.