Structural Cost Drivers: Food Fare is a small chain of restaurants that has deve

Question

Structural Cost Drivers: Food Fare is a small chain of restaurants that has developed a loyal customer base by providing fast-food items with more choices (e.g., how the hamburger should be cooked; self-serve toppings) and a more comfortable atmosphere. The menu has a small number of popular items, including several different hamburgers, grilled chicken sandwiches, and salads. Recently, to broaden its appeal, Food Fare added barbecue, seafood, and steak to its menu. Identify the important structural cost drivers for the company and the related strategic issues that it should address to be competitive.

Explanation / Answer

If the number of items served is the cost driver, for a single month the depreciation on restaurants world is a fixed cost. Over several years, if sales are strong, a strategic decision will be made to open additional restaurants; if sales are weak, strategic decisions will likely be made to close some items. Hence, over a multiple-year period, the number of items varies with sales volume, making depreciation appear as a variable cost with sales revenue as the cost driver. For the purpose of developing plans for extended time periods, it is more appropriate to consider possible variations in one or more strategic cost drivers. When this is done, many costs otherwise classified as fixed are better classified as variable.

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