franchises. BQ’s best-selling item is the Slopper (it slops out of the
bun). BQ supplies the ingredients for the Slopper (bun, mystery meat,
etc.) at cost to the franchise. The franchisee’s average cost per
Slopper (including ingredients, labor cost, and so on) is $.80. At a
particular franchise restaurant, weekly demand for Sloppers is given
by P 3.00 Q/800.
a. If BQ sets the price and weekly sales quantity of Sloppers, what
quantity and price would it set? How much does BQ receive? What is
the franchisee’s net profit?
b. Suppose the franchise owner sets the price and sales quantity. What
price and quantity will the owner set? (Hint:Remember that the
owner keeps only $.80 of each extra dollar of revenue earned.) How
does the total profit earned by the two parties compare to their total
profit in part (a)?
c. Now, suppose BQ and an individual franchise owner enter into an
agreement in which BQ is entitled to a share of the franchisee’s
profit. Will profit sharing remove the conflict between BQ and
the franchise operator? Under profit sharing, what will be the
price and quantity of Sloppers? (Does the exact split of the profit
affect your answer? Explain briefly.) What is the resulting total
profit?
d. Profit sharing is not widely practiced in the franchise business. What
are its disadvantages relative to revenue sharing?- Suppose a firm assesses its profit function as
a. Compute the firm’s profit for the following levels of output: Q 2, 8,
and 14.
b. Derive an expression for marginal profit. Compute marginal profit at
Q 2, 8, and 14. Confirm that profit is maximized at Q 8. (Why is
profit not maximized at Q 2?)Discussion Question As vice president of sales for a rapidly growing company,
you are grappling with the question of expanding the size of your direct sales
force (from its current level of 60 national salespeople). You are considering
hiring from 5 to 10 additional personnel.
How would you estimate the additional dollar cost of each additional sales-
person? Based on your company’s past sales experience, how would you esti-
mate the expected net revenue generated by an additional salesperson? (Be
specific about the information you might use to derive this estimate.) How
would you use these cost and revenue estimates to determine whether a sales
force increase (or possibly a decrease) is warranted?10 48Q15Q^2 Q^3.
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