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, costs would be $5,050 per month for location A, $5,570 per month for location B, and $5,770 per month for location C. a. Determine the volume necessary at each location to realize a monthly profit of $9,500. (Do not round intermediate calculations. Round your answer to the nearest whole number.) Monthly Volume St ? b-1. If expected sales at A, B, and C are 20,400 per month, 22,800 per month, and 23,400 per month respectively, calculate the profit of the each locations? (Omit the "$" sign in your response.) Location Monthly Profits b-2. Which location would yield the greatest profits? Location A OLocation B O Location C References eBook & Resources Worksheet Difficulty: 1 Easy

Explanation / Answer

Fi = Fixed cost = Rent and equipment cost per month

V = Variable cost per sandwich = $1.60 per S/W

S = Unit revenue = selling price per sandwich = $2.51 per S/W

Let Qi = Production Volume at the location i

Where, i = A, B, C for three locations

The algebraic form of calculating profit (loss) is as follows:

Profit (P) = Total Revenue – Total Cost

Total Cost = Fixed cost + Total variable cost = F + Q*V

Total Revenue = Quantity x unit revenue = Q*S

Pi = (Qi)(S) – Fi – (Qi)(V) = (S – V)*Q – Fi

Where, S - V = Contribution margin = Cm

For all three location, Cm = $2.51 - $1.60 = $1.57

Pi = $1.57Qi - Fi

Qi­ = (Pi + Fi)/$1.57

For the profit of $9,500 at all three locations. The monthly volume is calculated as follows:

Location (i)

Fixed monthly Cost (Fi)

monthly Profit (Pi)

Monthly Volume (Qi)

A

$5,050

$9,500

(9500+5050)/1.57

= 9274.9

B

$5,570

$9,500

9606.375

C

$5,770

$9,500

9733.865

ANS:

Location (i)

Monthly Volume (Qi)

A

9275

B

9606

C

9734

Part b-1:

The profit for given monthly volume is obtained by following formula:

Pi = $1.57Qi - Fi

Location

Fixed monthly Cost (Fi)

Monthly Volume (Qi)

monthly Profit (Pi)

A

$5,050

20,400

$26,952.5

B

$5,570

22,800

$30,197.5

C

$5,770

23,400

$30,938.75

b-2

Location C have greatest profit

Location (i)

Fixed monthly Cost (Fi)

monthly Profit (Pi)

Monthly Volume (Qi)

A

$5,050

$9,500

(9500+5050)/1.57

= 9274.9

B

$5,570

$9,500

9606.375

C

$5,770

$9,500

9733.865

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