Essay about Functions Of A Fixed Cost Structure
After completing CVP analysis, breaking down the variable and fixed cost structure, and understanding the special order, I believe that going to a fixed cost structure would be in the best interest of the company. Outlined are the risk associated with this change, the probability of reaching the projected net income, and the results of the special order.
Comparison of Cost Structure
As suggested, Wall Street Burger Shoppe used the fixed cost structure in the months June to October. I found that while using the fixed cost structure proves to be the more risker option, it’s still be a viable option for the shop to implement. For starters, as sales increase the fixed cost structure allows for higher profitability since fixed expenses do not tie directly to the sales of hamburgers while more variable costs increase in relation to sales.
The fixed cost structure does come with risk. It has a higher operating leverage then the variable structure which demonstrates that more of the contribution margin is used for fixed expenses1. I believe this is fine because if profits continue to rise, the contribution margin will increase while fixed expenses will stay constant which will increase the company’s profitability.
If the sales do continue to rise, the consequences of staying on a variable cost structure increases because variable expenses increase with sales. Restaurants in general have fluctuating sales, which makes the fixed cost structure riskier,…