Question

Does each Subway $5 Footlong cost the franchisee more than $5? Subway, the fast food restaurant franchise, recently announced it is bringing back the “$5 Footlong” promotion. Hundreds of Subway franchise owners are protesting the promotion, saying that they cannot afford to sell the footlong sub sandwiches for $5. Assume that the costs related to a Subway footlong and a Subway franchisee include the following:

Cost per sandwich 2.00 Details Per footlong Labor $14.00/hour wage rate, each worker can make 7 sandwiches per hour 1.0% + $0.10 per transaction $360 per month divided by 4,000 orders per month Rent $1,200 per month divided by 4,000 orders per month Franchise and startup fees $36,000 divided by 180 months (15 years) divided by 4,000 orders per month 8.0% of sales 4.5% of sales $600 per month divided by 4,000 orders Cost item Food ingredients Labor cost per footlong Credit card transaction fee Electricity 2.00 0.15 0.09 Rent 0.30 0.05 Franchise fee amortization Royalty fee Advertising fee Equipment leasing cost Cost per footlong sandwich Assume that all transactions are paid for using a credit card. 0.40 0.23 0.15 $ 5.37

1. Identify each of the listed costs of one footlong sub sandwich as either variable, fixed, or mixed.

2. What costs and factors do you think should be relevant to the footlong sub sandwich pricing decision? Explain.

3. What is the contribution margin of each $5 footlong sub sandwich?

4. Do you agree that a Subway franchisee would lose money for each footlong sold for $5? Why or why not?

Answer 1

1. Cost item	Type of cost	Remark
Food ingredients	Variable cost	Since it will change with the level of production
Labor cost per footlong	Variable cost	Since it will change with the level of production
credit card transaction fees	Mixed cost	Because 1% is fixed and $ 0.10 is depend on the no of transaction
Electricity	Fixed Cost	Since it will not change with the level of production
Rent	Fixed Cost	Since it will not change with the level of production
Franchise Fee Amortization	Fixed Cost	Since it will not change with the level of production
Royalty fee	Variable cost	Since it is depend on the sales value
Advertising fees	Variable cost	Since it is depend on the sales value
Equipment leasing cost	Fixed Cost	Since it will not change with the level of production

2. Only variable cost and mixed cost should be taken into account while making pricing decision. Other factors like supply of labor, material, price and demand effect should be taken into account.