Raghvi Arya
1.
[(2175-2265)/2265]*100= -3.97%
2. c. Sales Maximisation
3. Average revenue is the revenue generated per unit of output sold i.e. price7.
Average cost is the total cost divided by the output quantity. Since the annual revenue
of Subway trails McDonalds, it is likely that their total revenue is falling due to
competition from rival firms such as McDonalds. However, Subway also has more
food stores than any other business in the world with 40,000 in 2013, and so their
total quantity of goods sold is expected to be increasing. Since total revenue is falling
and total quantity of goods sold is increasing, average revenue is expected to be
falling. Since they are increasing the number of stores, their total cost must be rising
due to the cost of building new stores. The companies must be in diseconomies of
scale because its a huge business with so many stores to manage resulting in
managerial difficulties with management lacking the experience necessary to maintain
focus and control and so their average costs will be rising.
Subway has high output and low
average revenue
Cost
Quantity
Subway is at a high output where
cost is rising with diseconomies
of scale
Quantity
Raghvi Arya
Part B
1. The principal-agent problem happens where there are a large number of
shareholders and the day-to-day management is delegated to a board of directors
and from them to their managers. This can result in the managers, or agents,
making decisions that dont necessarily match the direction in which the owners
would like to take the business due to asymmetric information. Since Subway
operates a franchise model, the parent company sells the right to use their business
model to independent third parties. However, since Subway has opened over
40,000 stores in over 110 countries, it is likely that there is asymmetric or
insufficient information given to each individual manager. For example, a Subway
manager in France may decide to launch a blue, white and red colour scheme for
Bastille Day, but the Connecticut headquarters may want consistency in the
branding across each franchise and disapprove of this.
2. Subway may enjoy business growth as it aims to profit maximise, reducing costs
and gaining economies of scale. In the last few years, few businesses have grown
as successfully as the American fast-food restaurant Subway. This has allowed
Subway to enjoy increased market share, in order to try and become the dominant
firm in the fast-food industry. This would let them increase their profit, with
monopoly power enabling them to set prices to their benefit without any strong
competition. Since they can set their own prices, they dont have to worry about
selling at the market equilibrium since through establishing brand loyalty, the
PED of their goods would decrease. This is evident through Subway having more
restaurants than any other food company in the world and the third highest total
revenue.
In evaluation, there are disadvantages to Subways business growth as well. Since
Subway is such a large business with over 40,000 stores, they are likely to have
already exploited economies of scale and the optimum efficiency may have
already been achieved. The firm has probably reached diseconomies of scale with
inefficiencies and an increase in average cost. With each additional restaurant
opened, Subway must hire a manager and train cooks. The loss of personal
managerial control and the principal-agent problem may result in increased costs
and eventual losses. This is evident through the fact that McDonalds has
approximately 8,000 fewer locations than Subway, but triple the revenue.
3. Sales maximisation occurs when a firm attempts to sell as much as it can without
making a loss. This occurs when average cost equals average revenue as shown
below, allowing them to drive a rival, i.e. Subway, out of the industry through
investment into fields such as marketing.
Raghvi Arya
A rival may attempt to use marketing techniques, such as rebranding their
company by promoting different foods. To drive Subway out, and increase their
own sales, companies could promote healthier products, adapting to changes in
consumer tastes and trends, as this is Subways USP. This would increase the
number of substitutes in the market for healthy fast food in the eyes of the
consumer, increasing the XED of the two companies goods and increasing the
demand for Subways rival. For example, Chipotle has been offering food with
fewer additives, anticipating trends in consumer tastes. This has resulted in a
slowdown in Subways relentless growth.
In evaluation, the investment in marketing cannot be recouped if the campaign
fails since it is a sunk cost. A sunk cost is a cost that an entity has incurred, and
which it can no longer recover by any means. For example, Coca-Cola spent
millions in trying to bring its purified tap water Dasani to the UK market, but the
product failed to take off after negative publicity. If a company does not have the
capacity to take such a risk then after a failed campaign it may have to close due
to the lack of funds to continue. Or, if the company is a large one, they may
decide to try to increase growth in every way possible with one of the ways being
advertising. They may spend a huge amount of money without considering
exactly what they are doing just because they have the funds to do so. If instead
the company is given negative publicity, it may decrease brand loyalty and the
demand for the rival company and instead consumers may substitute to buying
from Subway instead, increasing Subways sales instead of its rivals. Advertising
is a business cost and so it will increase the companys average cost. As a result
they may have to increase their prices reducing demand. If average revenue does
not increase then average revenue would not meet average cost and sales would
not be maximised. As a result the rival firm would find it more difficult to drive
Subway out of the industry.
