The owner of Genuine Subs, Inc., hopes to expand the present operation by adding

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 $1.90 per sandwich. Sandwiches sell for $2.70 each in all locations. Rent and equipment costs would be $5,400 per month for location A, $5,700 per month for location B, and $5,950 per month for location C.

a. Determine the volume necessary at each location to realize a monthly profit of $10,000.

b-1. If expected sales at A, B, and C are 21,000 per month, 23,000 per month, and 24,000 per month, respectively, calculate the profit of the each locations?

Explanation / Answer

For each location Variable cost (VC) = $1.90

For each location selling price(SP) = $2.70

Fixed cost (FC) for each location are

a) If profit (P) = $10000,let volume of output = Q

For location A:

P = Q(SP - VC) - FC

=> 10000 = Q(2.70-1.90) - 5400

=> 10000 = 0.8Q - 5400

=> 0.8Q = 10000+5400

=> 0.8Q = 15400

=> Q = 15400/0.8

=> Q = 19250

For location B:

P = Q(SP - VC) - FC

=> 10000 = Q(2.70-1.90)-5700

=> 10000= 0.8Q - 5700

=> 0.8Q = 10000+5700

=> 0.8Q = 15700

=> Q = 15700/0.8

=> Q = 19625

For location C:

P =Q(SP - VC) - FC

=> 10000 = Q(2.70-1.90)-5950

=> 10000 = 0.8Q - 5950

=> 0.8Q = 10000+5950

=> 0.8Q = 15950

=> Q = 15950/0.8

=> Q = 19937.5

b) If the volume of output (Q) for A = 21000,B=23000 and C=24000

Profit for location A = Q(SP - VC) - FC

= 21000(2.70-1.90) - 5400

= (21000 x 0.8)-5400

= 16800-5400

= $11400

Profit for location B = Q(SP - VC) - FC

= 23000(2.70-1.90)-5700

= (23000 x 0.8)-5700

= 18400-5700

= $12700

Profit for location C = Q(SP - VC) - FC

= 24000(2.70-1.90)-5950

= (24000 x 0.8)-5950

= 19200-5950

= $13250

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