Subway is analyzing whether they should invest in a new type of sandwich. They h

Question

Subway is analyzing whether they should invest in a new type of sandwich. They have already spent $10,000 on new cookies this year. The new sandwich is estimated to generate $2/sandwich of revenue and cost $1.50 in variable expense. If the investment is taken on Subway’s working capital will increase by $5,000 and it is estimated the revenue from other sandwiches will decrease by $1,500 a year. Instead of investing in the new sandwich Subway could buy a new oven for $80. In figuring Subway’s incremental cash flows, which figure should not be used? Question 4 options:

A) $80

B) $10,000

C) $1,500

D) $5,000

Explanation / Answer

The correct option is B) $ 10,000

All the other numbers are related to the incremental cash flow analysis of investing in sandwich. $ 10,000 relates to investment in cookies, and that investment has already been done. It is not relevant to the product line in question and it is also historical in nature, and thereby not relevant to decision making.

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