50 percent (net sales) = $85,000 + 30.5 percent (net sales) Net sales = ? 50 percent (net sales) = $87,000 + 28.2 percent (net sales) Net sales = ? Here is more info: 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 $37,500 licensing fee in addition to an 4-percent royalty on sales and a 4.2-percent advertising fee on sales. Blimpie, while requiring an $35,000 licensing fee, charges only a 6-percent royalty and a 4.5-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 $87,000 and your variable expenses would increase from 20 percent of sales to 28.2 percent (20 percent + 4 percent + 4.2 percent). Blimpie’s would increase fixed expenses by $35,000 and variable expenses by 10.5 percent.