Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 10

The Santa Fe Cookie Factory is considering an expansion of its retail piñon cookie business to other cities. The firm's owners lack the funds needed to undertake the expansion on their own. They are considering a franchise arrangement for the new outlets. The company incurs variable costs of $6 for each pound of cookies sold. The fixed costs of operating a typical retail outlet are estimated to be $300,000 per year. The demand function facing each retail outlet is estimated to be
P = $50 -.001Q
where P is the price per pound of cookies and Q is the number of pounds of cookies sold. [Note: Total revenue equals price (P) times quantity (Q) sold.]
a. What price, output, total revenue, total cost, and total profit level will each profitmaximizing franchise experience
b. Assume that the parent company charges each franchisee a fee equal to 5 percent of total revenues, and recompute the values in part (a).
c. The Santa Fe Cookie Factory is considering a combined fixed/variable franchise fee structure. Under this arrangement, each franchisee would pay the parent company $25,000 plus 1 percent of total revenues. Recompute the values in part (a).
d. What franchise fee arrangement do you recommend that the Santa Fe Cookie Factory adopt What are the advantages and disadvantages of each plan