EOC Chapter 9 Question 3

1) If they decide to go the route of purchasing the restaurant, some fixed costs would be incurred. Those five; insurance, property tax, rent/mortgage, employee salaries and utilities. "A fixed cost is one that remains constant despite increases or decreases in sales volume (number of guests served or number of rooms sold)." (316)

2) To operate the restaurant, the variable costs would be; direct materials, commissions, production supplies, credit card fees and food costs. "A variable cost is one that increases as sales volume increases and decreases as sales volume decreases" (317)
3) Taking this into consideration, both decisions are very important. I think the flexibility of a good manager that is able to utilize variable costs far outweigh the options that are given with fixed costs. Lorelei can either reap the profits or watch the ship sink the restaurant.  "Good managers seek to decrease their fixed costs to their lowest practical levels while still satisfying the needs of the business and its customers. Those same good managers, however, know that increases in variable costs are usually very good!" (318)