If Dan and Loralei would decide to buy the restaurant, there would be some fixed costs that would come along the way. A fixed cost is a cost that "remains constant despite increases or decreases in sales volume (number of guests served or number of rooms sold) (Dopson 316)". One of the most common fixed costs for this property would be payments for insurance policies. These would remain constant and would have to be maintained if the property was owned. Another example, similar to the insurance policy payments, would be the property taxes. Then there are controllable fixed costs. "Good managers seek to decrease their fixed costs to their lowest practical levels while still satisfying the needs of the business and its customers (Dopson 318)." If Dan and Loralei were to decide to have music and entertainment for their business, this would also be a fixed cost but could be lowered if desired. The rental space in which the restaurant is located may also be a fixed cost. Lastly, the management salaries are a fixed cost.
However, if Dan and Loralei choose to operate the restaurant some variable costs are also going to occur. "A variable cost is one that increases as sales volume increases and decreases as sales volume decreases (Dopson 316)." The top variable costs for them are going to be food and beverage cost. Cleaning, equipment, payroll and bank interest are going to be some other variable costs.
I think that Dan has a good point when he says that he can reduce the prices of the Watershed. Since they can get it at the right price, that will be a fixed cost that will not change. If they can get their variable costs down to where they need to be it will make more sense for them to obtain the business. I think Dan's ideas are going to be the most profitable because lowering the costs slightly will help to make that 7 cents loss on a dollar become more profitable.
Dopson, Lea R. Managerial Accounting for the Hospitality Industry. Wiley, 09/2008. [The Art Institutes].
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