For Prof. Xavier

Corrective Aetion process

Revenues :

Variable costs (7096)

Food cost

Beverage cost

s10,000 s12,000 s 10,000

(7,000) (8,400) (5,000)

Fixed costs: current (207o) (2,000) (2,000) (2,000)

lncreasing revenue by $2,000 yields only a 5600 increase in profit (S1,600 _ S1,000); decreasing variable costs by $2,000 increases profit by S2,O0O (S3,O0O _ S1,000).

B. which of thefoflowing costs shoutd be managed first?which is the priority?

34o/o

30o/o

32o/o

25o/o

(2o/o)

(5o/o)

At first it appears that beverage cost represents the bigger problefi: a 5olo variance compared to only 2% for food cost. However, more details may affect that opinion:

Food revenue

Food cost %

Food cost

s350,000

34o/o

s350,000

32o/o

s 1 1 2,000

A. ls it preferable to increase revenue or decrease variable costs? Consider the following example.

Beverage revenue

Beverage cost %

Beverage cost

51 1 9,000

s 100,000

30o/o

s100,000

25%

s25,000s 30,000

297