Sunk costs exist at all levels of any business and should be excluded from the decision-making process. If the company is considering adding a deluxe Teen Burger priced one dollar higher and costing twenty-five cents more to produce, the cost of the building, and cooking equipment have already been incurred and do not need to be considered. This is of particular importance when a new restaurant, menu item, or other project has not performed as expected. At times, there can be an emotional response where the desire to make back costs already sunk can lead to further investing aiming to recover losses rather than evaluating the new spending against only its own likely returns. This is called a Sunk Cost Dilemma (Investopedia, 2012).
2.3.2 …show more content…
When looking at variable costs it was stated four staff can manage 2000 Teen Burger Sales in a shift and the projection for a shift is 1950 Teen Burgers. Given that, staffing four members seems reasonable. The next best choice would be five crew members. Three is too few. Expected sales is very near the capacity for four crew members. At four members, it is possible employees are rushed. There could be future costs if the quality of work from the cooks drop, or level of courtesy from the attendees is reduced because of too high a workload. If projections turn out to be low or staff calls in sick in these Opportunity costs might exceed the cost of the fifth cook an attendee. Considering the Opportunity costs of the next best option allows a manager to better judge the value of each decision against the costs and benefits of the other. Over staffing slightly may be the best option. Keeping costs to a minimum may be the best option. Making the right management decision first involves identifying and weighing Opportunity costs of the next best option. 2.4 Break-even analysis Break-even is the point in which all costs equal all revenues. At this point a company neither makes a profit or takes a loss. In order to break even a company must make enough revenue to cover its variable and fixed expense (Berry, 2015). Refer to section 2.2 for more information on variable and fixed expenses. 2.4.1 Contribution
2.3.2 …show more content…
When looking at variable costs it was stated four staff can manage 2000 Teen Burger Sales in a shift and the projection for a shift is 1950 Teen Burgers. Given that, staffing four members seems reasonable. The next best choice would be five crew members. Three is too few. Expected sales is very near the capacity for four crew members. At four members, it is possible employees are rushed. There could be future costs if the quality of work from the cooks drop, or level of courtesy from the attendees is reduced because of too high a workload. If projections turn out to be low or staff calls in sick in these Opportunity costs might exceed the cost of the fifth cook an attendee. Considering the Opportunity costs of the next best option allows a manager to better judge the value of each decision against the costs and benefits of the other. Over staffing slightly may be the best option. Keeping costs to a minimum may be the best option. Making the right management decision first involves identifying and weighing Opportunity costs of the next best option. 2.4 Break-even analysis Break-even is the point in which all costs equal all revenues. At this point a company neither makes a profit or takes a loss. In order to break even a company must make enough revenue to cover its variable and fixed expense (Berry, 2015). Refer to section 2.2 for more information on variable and fixed expenses. 2.4.1 Contribution