Week 9 EOC: Book Question

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. Five important fixed cost that would be directly affected include management salaries, property taxes, insurance policies, mortgage and depreciation. "A fixed cost is one that remains constant despite increases or decreases in sales volume (number of guests served or number of rooms sold)." (316)
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. Five important variable costs that would be directly affected would be food costs, beverage costs, labor costs, utilities and commissions. "A variable cost is one that increases as sales volume increases and decreases as sales volume decreases." (317)
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? In order to create a successful business, Dan and Loralei will have to combine their efforts to maintain a productive business strategy. In order to create a profit, an increase in sale and a decrease in costs would both be very helpful. The duo will have to first analyze the current situation for the fixed cost to determine exactly how much it actually costs to run the business. "Good managers seek to decrease their fixed costs to their lowest practical levels while still satisfying the needs of the business and its customers." (318) This is where certain costs are cut in order to set the business up for profitability. From there, variable costs will be analyzed during operation and costs will be cut where needed. This combine effort will set the business up for the fastest track to profitability.