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SUBWAY QUESTIONS Initial Margin

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SUBWAY QUESTIONS Initial Margin Powered By Docstoc
					CONTRIBUTION MARGIN ON ONE UNIT SALE
                       A CAN OF SODA
  Selling price for one can of soda                              $1.00


  Cost of Goods Sold      (direct cost of the product/service)

  Average cost of a can of soda                       $ .50
  Average shipping/distribution cost per unit         $ .06
           TOTAL COGS                                            $ .56

  GROSS PROFIT PER CAN                                           $ .44

  Less: Other variable costs                          $ .00

  CONTRIBUTION MARGIN          (AFTER ALL DIRECT COSTS)          $ .44
BREAK-EVEN POINT FOR SODA VENDING BUSINESS
                SCHOOL OF BUSINESS AGREEMENT

   Agreement with School of Business to locate a soda vending machine in Chan Shun
   Hall. School of Business wants 25% of the gross profit per can in exchange for
   giving you the exclusive vending rights to their building.

   QUESTION: What is your break-even point if the initial contribution margin
   is $.44/can?

   YOUR FIXED COSTS:
   Rent on Vending Machine               $ 50/mo

   TOTAL MONTHLY FIXED COSTS = $ 50/mo

   GROSS PROFIT (CONTRIBUTION MARGIN) PER SODA = $ .44
   LESS: 25% to be paid to School of Business (a variable cost) - .11
   NET CONTRIBUTION TO YOUR OVERHEAD AND PROFIT $ .33

   BREAK-EVEN POINT = $ 50/.33 = 151.5 cans of soda per month
 SODA VENDING BUSINESS – 200 cans/mo
              SCHOOL OF BUSINESS AGREEMENT

If you expect to sell about 200 cans of soda per month, what profits do you expect?

Cost of Goods Sold        (direct cost of the product/service)

Average cost of a can of soda                     $ .50
Average shipping/distribution cost per unit       $ .06
Royalty paid to School of Business per can        $ .11
         TOTAL COGS                                         $ .67

GROSS PROFIT/CONTRIBUTION MARGIN per soda = $ .33

BREAK-EVEN POINT = $ 50/.33 = 151.5 cans of soda per month

If 200 sodas sold per month…
          REVENUES (200 x $1)                     $ 200
          Less: COGS (200 x $.67)       - 134
          Gross Profits                           $ 66
          Less: Fixed Costs             - 50
          NET PROFITS                             $ 16/mo ($192/yr)
PROFITS FOR SODA VENDING BUSINESS
            Assumes sales of 300 and 400 cans/mo

If 300 sodas sold per month…
        REVENUES (300 x $1)                 $ 300
        Less: COGS (300 x $.67)    - 201
        Gross Profits                       $ 99
        Less: Fixed Costs          - 50
        NET PROFITS                         $ 49/mo ($588/yr)



If 400 sodas sold per month…
        REVENUES (400 x $1)                 $ 400
        Less: COGS (400 x $.67)    - 268
        Gross Profits                       $ 132
        Less: Fixed Costs          - 50
        NET PROFITS                         $ 82/mo ($984/yr)
        THE ECONOMICS OF ONE UNIT SALE

Selling price for one foot-long veggie-turkey sandwich                     $ 5.00
Cost of Goods Sold         Price    Unit       Used       Cost
VeggieTurkey (1/4 lb)      $3.20    per lb     ¼ lb       $ .80
Cheese (5 slices)          $2.88    24 pack    5 slices   $ .60
Tomato (1/4 lb)            $1.60    per lb     ¼ lb       $ .40
Pickles (2)                $ .12    each       2 each     $ .24
Lettuce (2 oz)             $1.28    per lb     2 oz       $ .16
Bread (1 long roll)        $3.96    dozen      1 roll     $ .33
Miracle Whip (1 oz)        $3.84    32oz jar   1 oz       $ .12
Mustard (1/2 oz)           $2.40    20oz jar   ½ oz       $ .06
Salt (2 shakes)            $1.00    per lb     1/100 lb   $ .01
Napkins (2)                $3.00    100 pack   2 each     $ .06
Paper wrapping (2 foot)    $ .10    per foot   2 feet     $ .20
Plastic bag (1)            $7.00    100 roll   1 bag      $ .07   $ 3.05

CONTRIBUTION MARGIN                                                        $1.95

Direct Labor (3 min)       $8.00    per hr     1/20 hr    $ .40
COSTS INCLUDING DIRECT LABOR                                               $1.55
BREAK-EVEN FOR YOUR SANDWICH SHOP

 OVERHEAD EXPENSES

 Rent                                $1,000/ mo
 Electricity                         $100/ mo
 Phone                               $ 30/ mo
 Advertising                         $ 50/ mo
 Misc Supplies                       $ 50/ mo
 Monthly Labor                       312 hrs/mo x ($8.00/hr + 25% benefits)   = $3120/ mo
  (Open 26 days a month, 12 hours per day)

 TOTAL MONTHLY FIXED COSTS = $ 4,350/ mo

 CONTIBUTION MARGIN PER SANDWICH = $1.95

 BREAK-EVEN POINT = 4,350/1.95 = 2,230.77 sandwiches a month, or
 about 85.8 sandwiches per day! (That’s about 7.15 sandwiches per
 hour of operation!)
   PROFIT EXPECTATIONS FOR YOUR
           SANDWICH SHOP
OVERHEAD EXPENSES

Rent                                $1,000/ mo
Electricity                         $100/ mo
Phone                               $ 30/ mo
Advertising                         $ 50/ mo
Misc Supplies                       $ 50/ mo
Monthly Labor                       312 hrs/mo x ($8.00/hr + 25% benefits)   = $3120/ mo
 (Open 26 days a month, 12 hours per day)

TOTAL MONTHLY FIXED COSTS = $ 4,350/mo
ADD IN EXPECTED PROFITS OF $2,000/mo

CONTIBUTION MARGIN PER SANDWICH = $1.95

To achieve your profit objective, you must sell about 3,256.41
sandwiches a month ($6,350/1.95), or about 125.25 sandwiches per day!
(That’s about 10.5 sandwiches per hour of operation!)

				
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posted:1/9/2011
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