Week 9 EOC: Chapter 9 Apply What You've Learned (342-343)

“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. 

A. If Dan and Loralei decide to buy the restaurant, there will be some fixed costs "A fixed cost is one that remains constant despite increases or decreases in sales volume (number of guests served or number of rooms sold)."(Dopson 317). There are five costs which I believe will be directly affected by their purchase, which will affecting whether or not they purchase the property. These fixed costs are as follows, music and entertainment, administrative and general, occupancy, depreciation, and interest.

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. If Dan and Loralei operate the restaurant, there will be some variable costs "A variable cost is one that increases as sales volume increases and decreases as sales volume decreases."(Dopson 318). There are five costs which I believe will be directly affected by their decisions if they choice to purchases the restaurant. These variable costs are as follows, food cost, beverage cost, labor cost, consumables (i.e. napkins, etc.) and guest type.

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?

A. Considering the decisions Dan and Loralei will need to make if they choose to acquire the restaurant, it is important to determine the menu pricing. "Perhaps no area of hospitality management is less well understood than the area of pricing food and beverage products"(Dopson 240). For these reasons I believe that they should follow Loralei's needs over Dan's when making the final decisions based on the fact the restaurant is currently losing money stating that the cost need to be based on sales more than just fixed costs.

Work Cited: 

Dopson, Lea R. Managerial Accounting for the Hospitality Industry. Wiley, 09/2008. VitalSource Bookshelf Online.