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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

• Identify each of the listed costs of one footlong sub sandwich as either variable, fixed, or mixed.
• What costs and factors do you think should be relevant to the footlong sub sandwich pricing decision? Explain.
• What is the contribution margin of each $5 footlong sub sandwich?
• Do you agree that a Subway franchisee would lose money for each footlong sold for $5? Why or why not?

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