Question

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

Questions (Be sure to understand the following concepts before answering: (Variable Costs, Fix Costs, Mixed Costs):

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. 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.

3. Yes I agree that Subway would lose money if it sells footlong for $5 as the cost of production is more i.e. $5.37. So for each footlong sold for $5, Subway does not even reach the break even point. Hence it should not sell footlong for $5.