Ken\'s Cornerspot, a popular university eatery in a competitivemarket, has seati
ID: 2433786 • Letter: K
Question
Ken's Cornerspot, a popular university eatery in a competitivemarket, has seating and staff capacity to serve about 600 lunchcustomers every day. For the past 2 months, demand has fallenfrom its previous near-capacity level. Concerned about hisdeclining profit, Ken decided to take a closer look at hiscosts. He concluded that food was the primary cost thatvaried with meals served; the remaining costs of 3,300 per day werefixed. With demand averaging 330 lunches per day for the past2 months, Ken thought it was reasonable to divide the 3,300 fixedcosts by the current average demand of 550 lunches to arrive at anestimate of $6 of support costs per meal served. Noting thathis support costs per meal had now increased, he contemplatedraising his meal prices.a. What is likely to happen if Ken continues to recompute hiscosts using the same approach if demand decreases further?
b. Advise Ken on choosing a cost driver quantity forcomputing support costs per meal and explain why you advocate yourchoice of quantity.
Explanation / Answer
With demand averaging 330 lunches per day for the past 2months doesn't match with current average demand of 550 lunches I assume it as typo error and solve on the basis of 550lunches on daily average basis _________________________________________________________________________ Ken's fixed cost per meal based on average capacity of600 meals per day = $3,300/600 = $5.50 With fallen demand fixed cost based on averagedemand of 550 meals per day would be calculated as = $3,300/550 =$6.00 If demand decreases further the average committedcost (from existing $6.00) would continue to increase. Consequently Ken will have noalternative left (if committed cost can not be reduced) to increase his selling price and which in turnmight have direct effect on demand. __________________________________________________________________________ b. Advise Ken on choosing a cost driver quantity forcomputing support costs per meal and explain why you advocate yourchoice of quantity. =============================================================== Ken should use the practicalcapacity quantity of meals per day to determine cost per mealin order to avoid the fluctuationsdescribed in part (a) and to understand the cost driver ratesat the point where the resources usedequal the practical capacity usage. If resource usage isless than practicalcapacity, Ken should monitor the cost of unused capacity. Hemay be able to reduce the capacity costs or tofind other profitable uses for the capacity. In this problem,one may assume the practical capacity is600 meals per day. I assume it as typo error and solve on the basis of 550lunches on daily average basis _________________________________________________________________________ Ken's fixed cost per meal based on average capacity of600 meals per day = $3,300/600 = $5.50 With fallen demand fixed cost based on averagedemand of 550 meals per day would be calculated as = $3,300/550 =$6.00 If demand decreases further the average committedcost (from existing $6.00) would continue to increase. Consequently Ken will have noalternative left (if committed cost can not be reduced) to increase his selling price and which in turnmight have direct effect on demand. __________________________________________________________________________ b. Advise Ken on choosing a cost driver quantity forcomputing support costs per meal and explain why you advocate yourchoice of quantity. =============================================================== Ken should use the practicalcapacity quantity of meals per day to determine cost per mealin order to avoid the fluctuationsdescribed in part (a) and to understand the cost driver ratesat the point where the resources usedequal the practical capacity usage. If resource usage isless than practicalcapacity, Ken should monitor the cost of unused capacity. Hemay be able to reduce the capacity costs or tofind other profitable uses for the capacity. In this problem,one may assume the practical capacity is600 meals per day.Related Questions
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