Assume that you own a sandwich shop. In looking over last year's income statement you see that the annual sales were $250,000 with a gross margin 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.

In discussions with your spouse, you wonder if joining a franchise operation such as Subway or Blimpie would improve your results. Your research has determined that Subway requires a $10,000 licensing fee in addition to an 8-percent royalty on sales and a 2.5-percent advertising fee on sales. Blimpie, while requiring an $18,000 licensing fee, charges only a 6-percent royalty and a 3-percent advertising fee.
Assuming that you wanted to break-even, what amount of sales would you have to generate with each channel during the first year, since both your fixed and 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 and your variable expenses would increase from 20 percent of sales to 30.5 percent (20 percent + 8 percent + 2.5 percent). Blimpie's would increase fixed expenses by $18,000 and variable expenses by 9 percent. Using the equation 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
As a result of the increased franchisee expenses, you would have to increase sales over 20 percent just to break even. To make the same profit you are already making, you would have to add that profit figure to 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 have to help you increase sales by over 75 percent. There is no doubt the image of the franchise will draw additional customers and its management may even help cut some of your other expenses. However, as these numbers point out, joining a franchise channel is not always a surefire guarantee of success.
Using either a franchise directory in the library or a franchisor's home page on the Internet: look up two competing franchise channels. After locating the information about these franchises, a cost analysis and determine if, based on these figures, joining a franchise is a good investment. You are required to show your work.
Hint: Start with an income statement.

If all you do is post your entire assignment, with no evidence of thinking on your part, nothing will happen since no one here will do your work for you.

But if you are specific about what you don't understand about the assignment or exactly what help you need, someone might be able to assist you. Ask specific questions!

To determine if joining a franchise is a good investment, you will need to analyze the cost and potential profit of each franchise option. Here's how you can do it:

1. Start with an income statement:
Create an income statement that outlines your current financials from operating your own sandwich shop. Include information such as annual sales, gross margin, fixed operating expenses, variable operating expenses, and profit.

2. Calculate the break-even point (BEP):
To calculate the break-even point, you need to find the level of sales at which the gross margin equals the total operating expenses. Use the equation:
Gross Margin = Fixed Operating Expenses + Variable Operating Expenses

For Subway:
Subway's fixed expenses increase from $50,000 to $60,000, and variable expenses increase to 30.5% of net sales (20% original variable expenses + 8% royalty + 2.5% advertising fee).

For Blimpie:
Blimpie's fixed expenses increase by $18,000, and variable expenses increase to 29% of net sales (20% original variable expenses + 6% royalty + 3% advertising fee).

Solve the equations to find the net sales required to break even for each franchise option.

3. Consider the desired profit:
If you want to maintain the same profit as your current business ($25,000), you need to include it in the break-even equation:
Gross Margin = Fixed Operating Expenses + Variable Operating Expenses + Profit

4. Calculate the net sales required with the desired profit for each franchise option.

For Subway:
Subway's equation becomes: 50% (net sales) = $60,000 + 30.5% (net sales) + $25,000

For Blimpie:
Blimpie's equation becomes: 50% (net sales) = $68,000 + 29% (net sales) + $25,000

Solve the equations to find the net sales required to break even with the desired profit for each franchise option.

5. Analyze the results:
Compare the net sales required for each franchise option to your current net sales ($250,000) to determine if joining a franchise is a good investment. Consider the increase in sales required to break even and maintain the same profit.

Keep in mind that these calculations provide a starting point, and there are other factors to consider when evaluating a franchise opportunity, such as market conditions, competition, branding, and support from the franchisor.