“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 it 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.

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.

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?