Resource Capacity Planning/ABC Two years ago, in conjunction with revitalization effortsregarding the downtown area of Metro City, you and your partner purchased a local eatery. Thoughmoribund at the time, you were able (through your hard work and dedicated efforts) to resurrect theestablishment. In fact, the last few months appear to have been quite successful from a financialstandpoint.However, your establishment now faces a new competitor—an eatery located only several blocksaway from yours. You and your partner are now evaluating strategic options as to how to deal withthis new competition. Your facility is capable of serving 200 meals a day. (Because your clienteleconsists almost exclusively of college-age students, the basic menu is the same for lunch and dinner. Currently, your business does not serve breakfast.)You and your partner have finally taken time to study the financial records carefully. Your investigation yields the following information:1. The primary variable cost is food (i.e., the total food cost varies in response to changes in thenumber of meals served).2. Fixed operating expenses (salaries, depreciation, etc.) average approximately $1,100 per day.3. The average number of meals served per day over the past three months was 175.In response to the above information, and in an attempt to fully recover your costs, you and yourpartner are contemplating a price increase.Required1. Compute the fixed cost per meal using the current capacity used and the fixed cost per meal using capacity available.2. Given the competitive situation, what is the likely result of the decision to raise prices? Explain.3. Suggest and defend an alternative approach for allocating budgeted fixed operating costs to each meal.
Resource Capacity Planning/ABC Two years ago, in conjunction with revitalization efforts
regarding the downtown area of Metro City, you and your partner purchased a local eatery. Though
moribund at the time, you were able (through your hard work and dedicated efforts) to resurrect the
establishment. In fact, the last few months appear to have been quite successful from a financial
standpoint.
However, your establishment now faces a new competitor—an eatery located only several blocks
away from yours. You and your partner are now evaluating strategic options as to how to deal with
this new competition. Your facility is capable of serving 200 meals a day. (Because your clientele
consists almost exclusively of college-age students, the basic menu is the same for lunch and dinner. Currently, your business does not serve breakfast.)
You and your partner have finally taken time to study the financial records carefully. Your investigation yields the following information:
1. The primary variable cost is food (i.e., the total food cost varies in response to changes in the
number of meals served).
2. Fixed operating expenses (salaries,
3. The average number of meals served per day over the past three months was 175.
In response to the above information, and in an attempt to fully recover your costs, you and your
partner are contemplating a price increase.
Required
1. Compute the fixed cost per meal using the current capacity used and the fixed cost per meal using capacity available.
2. Given the competitive situation, what is the likely result of the decision to raise prices? Explain.
3. Suggest and defend an alternative approach for allocating budgeted fixed operating costs to each meal.
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