Question

Bob owns a subway franchise and he is furious at the thought of offering $5.00 footlongs. His comment was "they cost us $5.41 each so we will be upside down on each sub sold. I’ll lose my shirt!". Do you agree or disagree with Bob that this idea should be immediately rejected without any further analysis? If you don’t agree with Bob, why do you think further analysis is required?

Answer 1

Answer:

• disagree
• a loss leader may increase sales of profitable items

Explanation:

Bob understands that he will be losing $0.41 on each foot-long sold. However, there are other items he sells that do make a profit. If sales of footlongs increases sales of profitable items, the net income may be positive. Further analysis is required.

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Many businesses use loss leaders to attract customers. While some customers may contribute no profit (or even a loss), others may make up for it.