Question

8. Chapter 8: 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.) or $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 location B, and $5,800 per month for location C. Determine the volume necessary at each location to realize a monthly profit of $10,000.

We have the following information shown below for three potential locations for a new outlet:

	A	B	C
R	$2.65	$2.65	$2.65
V	$1.76	$1.76	$1.76
Monthly FC	$5,000	$5,500	$5,800

a. Determine the monthly volume necessary at each location to realize a monthly profit of $10,000 (round to 1 decimal).

Answer 1

Location A:

Contribution Margin = R - V = 2.65 - 1.76 = 0.89

Monthly Fixed Cost = 5000

Monthly Profit = 10000

Monthly Volume = (Monthly Fixed Cost + Monthly Profit)/Contribution margin = 15000/0.89 = 16853.93 ~ 16854 units

Location B:

Contribution Margin = R - V = 2.65 - 1.76 = 0.89

Monthly Fixed Cost = 5500

Monthly Profit = 10000

Monthly Volume = (Monthly Fixed Cost + Monthly Profit)/Contribution margin = 15500/0.89 = 17415.73 ~ 17416 units

Location B:

Contribution Margin = R - V = 2.65 - 1.76 = 0.89

Monthly Fixed Cost = 5500

Monthly Profit = 10000

Monthly Volume = (Monthly Fixed Cost + Monthly Profit)/Contribution margin = 15000/0.89 = 16853.93 ~ 16854 units

Location C:

Contribution Margin = R - V = 2.65 - 1.76 = 0.89

Monthly Fixed Cost = 5800

Monthly Profit = 10000

Monthly Volume = (Monthly Fixed Cost + Monthly Profit)/Contribution margin = 15800/0.89 = 17752.80 ~ 17753 units