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

Assume that all transactions are paid for using a credit card.

Questions

  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?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

  • Student handout (pdf) (word) (contains entire blog posting + discussion questions)
  • PowerPoint file (brief article overview + discussion questions)

Copyright 2018 Wendy M. Tietz, LLC

About Dr. Wendy Tietz, CPA, CMA, CSCA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Education.

No comments yet... Be the first to leave a reply!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s

%d bloggers like this: