\"I think I can buy it at a great price,’’ said Dan Flood. He was talking about
ID: 2487569 • Letter: #
Question
"I think I can buy it at a great price,’’ said Dan Flood. He was talking about the Watershed Restaurant. The property was for sale and Dan was meeting with Loralei Glenn, his friend and an experienced restaurant manager. ‘‘It’s losing about 7 cents on each dollar sale now,’’ continued Dan, ‘‘but I know we can turn that around.’’ Loralei considered Dan’s proposal that they form a partnership, acquire the restaurant, and share in the profits they planned to make. She knew that, before it was possible to share profits, they would actually have to make a profit. That meant, to go from losing 7 cents per dollar to making money, they would have to increase sales, reduce costs, or both. She mentioned that to Dan. ‘‘Well,’’ he replied, ‘‘I’m not sure we need to increase the sales at all. If we buy at the right price, I think we just need to reduce our costs. You can do that!’’ Assume that the restaurant’s sales volume last year was approximately $1,400,000, and thus its loss for the year was about $98,000. 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
Explanation / Answer
A) Fixed Costs : Fixed Costs are costs that remain the same in total but vary per unit when production volume changes.
In every purchasing decision, even after the acquisition some fixed costs will continue to incur.thus even in given case if Dan and Loralei decide to buy the restaurant, some fixed costs will continue to incur, they are as follows.
Rent :
The Total rent of a factory always remains to be a fixed cost, even after the acquisition Dan and Loralei has to incur fixed cost of Rent to continue the operations
Salary of Higher or top management :
In majority acquisitions, higher level of employees continue to work after such acquisitions,so even Dan and Loralei has to incur such salary costs like salary to Plant manager etc.
Insurance :
If Dan and Loralei decide to buy the restaurant , they have icur fixed costs like Insurance for the Restaurant against any natural and man made disasters.
Property Taxes :
After acquisition of the restaurant, Dan and Loralei become the owners of the properties,so they have to incur property taxes for such properties even if they donot start operations.
Depreciation :
Eventhough depreciation is not a cash cost, but it continuos to be a fixed cost in majority cases,so d depreciation of factory buildings is one of the classic examples for fixed cost which continue incur after such purchase
Other than the above mentioned costs, there are a few more fixed costs which continue to incur after such purchase such as Fixed maintainance expenses, Fixed direct labour charges,etc.....
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.