1. If Dan and Loralei decide to buy the restaurant, some fixed costs would be incurred. List at least five important fixed costs that would be directly affected by the purchase decisions Dan would make regarding the acquisition of the property. A fixed cost is one that remains constant despite increases or decreases in sales volume (Dopson,317). Five important fixed costs that would directly affect Dan's purchasing decisions regarding acquisition and property would be: mortgage, depreciation, insurance policies, property taxes, and management salaries.
2. If Dan and Loralei operate the restaurant, some variable costs would be incurred. List at least five important variable costs that would be directly affected by the operating decisions Loralei will make as she manages the restaurant. A variable cost is one that increases as sales volume increases and decreases as sales volume decreases. (Dopson, 317). Five important fixed costs that would directly affect the operating decisions Loralei would make as a manager of the restaurant would be: food cost, beverage cost, utility services, marketing, repairs.
3. Consider the decisions Dan and Loralei will make if they choose to acquire the restaurant. While clearly both are important, whose decisions do you think are the most important to ensuring the future profitability of the Watershed? Why do you think so?
Good managers seek to decrease their fixed costs to their lowest practical levels while still satisfying the needs of the business and its customers. Those same good managers, however, know that increases in variable costs are usually very good (Dopson, 219).While fixed costs lay a good foundation for a business, it is the skillful management of variable costs that determine the overall success of a business. Loralei will be making daily decision that could make or break the profitability of the restaurant. Increases in variable cost show sales, which is a direct reflection of profit!
Reference:
Dopson, Lea R. Managerial Accounting for the Hospitality Industry. Wiley, 09/2008. [The Art Institutes].
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