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

Question

2. 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 loca- tion 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?

GBA 5206

Stevenson, W. J. (2018). Operations management (13th ed.). New York, NY: McGraw-Hill.

Explanation / Answer

a)

For each location, labor and materials cost varies in direct propostion to number of sandwiches sold, therefore it is variable cost

Rent and equipment cost is independent of numbe of sandwiches. Therefore it is fixed cost.

Volume necessary for location A = (Fixed cost + Profit) / (Selling price - Variable cost) = (5000 + 10000) / (2.65 - 1.76) = 16,854

Volume necessary for location B = (Fixed cost + Profit) / (Selling price - Variable cost) = (5500 + 10000) / (2.65 - 1.76) = 17,416

Volume necessary for location C = (Fixed cost + Profit) / (Selling price - Variable cost) = (5800 + 10000) / (2.65 - 1.76) = 17,753

b) Profit = Volume * (Selling price - Variable cost ) - Fixed cost

Profit at location A = 21000*(2.65 - 1.76) - 5000 = $ 13,690

Profit at location B = 22000*(2.65 - 1.76) - 5500 = $ 14,080

Profit at location C = 23000*(2.65 - 1.76) - 5800 = $ 14,670

Location C yields the greatest profits.

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