The Owner Of Genuine Subs, Inc., Hopes To Expand

The owner of Genuine Subs, Inc., hopes to expand the present operation by adding one new outlet

The owner of Genuine Subs, Inc., plans to expand by opening a new outlet and has studied three potential locations. Each location shares identical variable costs for labor and materials at $1.80 per sandwich, with sandwiches selling for $2.59 in all locations. The fixed costs, or rent and equipment costs, differ across locations: $5,080 for Location A, $5,600 for Location B, and $5,780 for Location C. The goal is to evaluate these locations based on required sales volume for profitability, expected sales, and other factors to determine the most advantageous choice for expansion.

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To determine the most suitable location for the new outlet, it is essential to analyze each location's break-even sales volume, expected profits, composite score based on various factors, and the optimal logistics concerning central warehouse placement. This comprehensive approach ensures that the decision maximizes profitability while considering operational and customer convenience.

Cost-Volume-Profit Analysis for Break-Even and Profitability

First, we analyze the sales volume needed at each location to achieve a targeted monthly profit of $10,000. This involves calculating the contribution margin per sandwich, which is the selling price minus the variable costs:

Contribution Margin = $2.59 - $1.80 = $0.79 per sandwich.

To determine the required volume to reach a profit of $10,000, we set up the equation:

Profit = (Contribution Margin × Volume) - Fixed Costs

Rearranged to find Volume:

Volume = (Fixed Costs + Desired Profit) / Contribution Margin

For Location A:

Volume_A = ($5,080 + $10,000) / $0.79 ≈ 19,620.25 ≈ 19,621 sandwiches.

For Location B:

Volume_B = ($5,600 + $10,000) / $0.79 ≈ 20,888.61 ≈ 20,889 sandwiches.

For Location C:

Volume_C = ($5,780 + $10,000) / $0.79 ≈ 20,392.41 ≈ 20,392 sandwiches.

Thus, the minimum monthly sales volume to achieve a $10,000 profit is approximately 19,621 for Location A, 20,889 for Location B, and 20,392 for Location C.

Expected Profits Based on Projected Sales

Next, considering the expected monthly sales, we analyze the profitability at the given estimates:

  • Location A: 20,300 sandwiches/month
  • Location B: 22,900 sandwiches/month
  • Location C: 23,400 sandwiches/month

Calculate the monthly profit for each location using the profit formula:

Profit = (Contribution Margin × Sales Volume) - Fixed Costs

Location A:

Profit_A = (0.79 × 20,300) - 5,080 ≈ 16,037 - 5,080 = 10,957

Location B:

Profit_B = (0.79 × 22,900) - 5,600 ≈ 18,091 - 5,600 = 12,491

Location C:

Profit_C = (0.79 × 23,400) - 5,780 ≈ 18,486 - 5,780 = 12,706

Based on expected monthly sales, Location C would generate the highest profit, followed by Location B, then Location A.

Location Selection Based on Composite Score

Furthermore, location selection can be refined by evaluating qualitative factors such as convenience, parking, display area, shopper traffic, operating costs, and neighborhood quality. Assigning score factors (e.g., from 1 to 10) allows calculating a weighted composite score for each location.

The formula for the composite score is:

Composite Score = (Weight1 × Score1) + (Weight2 × Score2) + ... + (WeightN × ScoreN)

Assuming the weights for each factor are provided or standardized, the scores can be calculated. The location with the highest composite score should be considered optimal from the qualitative perspective, balancing operational convenience and customer accessibility.

Optimal Warehouse Location for Distribution

Regarding logistics, the optimal warehouse location minimizes transportation costs by reducing the total travel distance to all locations. Using coordinate geometry, the centroid of the given points can be calculated as the average x and y coordinates:

x-coordinate:

Centroid_x = (4 + 8 + 4 + 4 + 6) / 5 = 26 / 5 = 5.2

y-coordinate:

Centroid_y = (7 + 3 + 6 + 1 + 4) / 5 = 21 / 5 = 4.2

Thus, the centralized warehouse should be located approximately at coordinates (5.2, 4.2), minimizing shipping distances to all five locations and optimizing logistics efficiency.

Conclusion

In conclusion, selecting the optimal location for the new Genuine Subs outlet involves a multifaceted evaluation. Based on cost-volume-profit analysis, Location C provides the highest expected profit from projected sales, while Location B is close in terms of initial investment. The qualitative factors, summarized through a composite score, must also be considered, with the highest scoring location balancing customer access and operational convenience. Lastly, establishing the warehouse at approximately (5.2, 4.2) ensures efficient distribution across all outlets. The final decision should integrate these quantitative and qualitative factors to maximize overall profitability and operational effectiveness.

References

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