In Chapter 4 the bookdiscussed divertive competition and int

In Chapter 4 the bookdiscussed divertive competition and introduced the topic of thebreakeven point (BEP), or the point where total revenues equal totalexpenses. Let’s see how this topic will help us determine whether tojoin a franchise or stay independent.   Assumethat you own a sandwich shop. In looking over last year’s incomestatement you see that the annual sales were $250,000 with a grossmargin of 50 percent, or $125,000. The fixed operating expenses were$50,000: the variable operating expenses were 20 percent of sales, or$50,000: and your profit was $25,000, or 10 percent of sales. Indiscussions with your spouse, you wonder if joining a franchiseoperation such as Subway or Blimpie would improve your results. Yourresearch has determined that Subway requires a $10,000 licensing fee inaddition to an 8-percent royalty on sales and a 2.5-percent advertisingfee on sales. Blimpie, while requiring an $18,000 licensing fee, chargesonly a 6-percent royalty and a 3-percent advertising fee.   Assumingthat you wanted to break-even, what amount of sales would you have togenerate with each channel during the first year, since both your fixedand variable expenses would increase?  Remember the break-even point (BEP) is where gross margin equals total operating expenses: in equation form, this is: Gross Margin =Fixed Operating Expenses + Variable Operating Expenses Thus,with Subway, fixed expenses would increase from $50,000 to $60,000 andyour variable expenses would increase from 20 percent of sales to 30.5percent (20 percent + 8 percent + 2.5 percent). Blimpie’s would increasefixed expenses by $18,000 and variable expenses by 9 percent. Using theequation we can calculate the BEP for both: Subway’s BEP: 50 percent (net sales) = $60,000 + 30.5 percent (net sales) Net sales = $307,692 Blimpie’s BEP: 50 percent (net sales) = $68,000 + 29 percent (net sales)  Net sales = $323,810 Asa result of the increased franchisee expenses, you would have toincrease sales over 20 percent just to break even. To make the sameprofit you are already making, you would have to add that profit figureto the equation. Gross Margin =Fixed Operating Expenses + Variable Operating Expenses + Profit Subway’s BEP with a $25,000 profit: 50 % (net sales) = $60,000 + 30.5 % (net sales) + $25,000 Net sales = $435,897 Blimpie’s BEP with a $25,000 profit: 50 % (net sales) = $68,000 + 29 % (net sales) + $25,000 Net sales = $442,857 Thus,to keep the same profit as you currently have, a franchise would haveto help you increase sales by over 75 percent. There is no doubt theimage of the franchise will draw additional customers and its managementmay even help cut some of your other expenses. However, as thesenumbers point out, joining a franchise channel is not always a surefireguarantee of success. Now, by using either a franchise directory inthe library (e.g., the International Franchise Association at or a franchisor’s home page on the Internet:look up two competing franchise channels in the same line of retailtrade. After locating the information about these franchises, do thesame cost analysis we just did and determine if, based on these figures,joining a franchise is a good investment. You are required to show yourwork.Please cite any outside sources. APA Format is required.

Posted in Uncategorized