Burger King franchises required to sell double cheeseburgers for $1 as part of their franchise agreement may or may not be losing money, based on the effectiveness of the promotion and whether more double cheeseburgers are sold at a loss than the number of other items that are sold at a profit. The relevant costs in this particular case would be the ingredients used in selling the double cheeseburger: specifically, the meat, the bun, the cheese, and the toppings. These would be relevant because they are required to produce a double cheeseburger, while costs associated with paying employees and costs for other food items would be considered irrelevant, as these would be accrued costs whether or not the promotion was occurring (Perloff and Brander, 2016).

The other factors that need to be considered would be the opportunity costs associated with the promotion: essentially, whether the promotion increases sales to the point where other food items that are sold make up for the losses accrued with the sale of double cheeseburgers. These opportunity costs might include selling extra fries, drinks, and other items that would typically be sold alongside a double cheeseburger. Additionally, the final factor to consider would be whether the promotion is so successful that there is a need to hire additional employees.

Generally speaking, the goal of a Burger King franchise is to make as much profit as possible for the franchise location. The goal of Burger King corporate is to make as much revenue as possible per location, as Burger King gets 4.5% of total revenue from each location. The difference is that a franchise is incentivized only to make profit, which would be revenue minus costs. Thus, they may be disincentivized to sell double cheeseburgers because this particular item is sold for a loss. Burger King Corporate receives a percentage of the total revenue, so it does not matter if double cheeseburgers are sold for a loss because it does not accrue this loss; rather, it makes money off each double cheeseburger sold because this adds to the overall revenue, even though each franchise selling these items are taking a loss with each item sold.

The best way to analyze this issue would be to evaluate franchise profits with and without the promotion. It is not unheard of to sell itms at a loss, if the loss on one item results in increased sales and profitability for another item (Lee et al., 2010). For instance, if the promotion drastically increases overall sales in other items, then although each franchise may be taking a loss with each double cheeseburger sold, the profits gained from other sales may more than make up for these losses. However, if the promotion only results in an increase in the sale of double cheeseburgers, and sale increases in other items are minimal or negligible, then each franchise will be losing money with the promotion. The extreme case would be if the promotion only resulted in an increase in double cheeseburger sales and nothing else was sold, at which point each franchise would be accruing a significant loss.

The fundamental problem is therefore that Burger King Corporate is finding ways to increase revenue, but this is not increasing profits for each franchise unless the promotion results in higher profits for each franchise due to other items sold. If the promotion attracts more customers, but the customers also buy other items, then there would not be a lack of alignment based on incentives if each franchise’s profitability also increased. The best way to resolve the problem would be for Burger King Corporate to take a percentage of the overall profits of each franchise location, rather than taking a percentage of the revenue, as this would align the goals of both the franchises and the corporate office.