Question

Question 2

After one month of operation, OU Café determined to shorten its business hours and close on weekends. What costs, fixed or variable, should OU Café have considered when it made the decision? Explain in detail.

Answer 1

The costs incured by the OU Cafe can be divided into two main categories: Fixed and Variable.
- Fixed costs are indipendent of output/sales and include expenses like rent, machinaries etc.
- Variable costs vary with the output and include expenses like wages, materials used for production, utility bills etc.

Now OU Cafe can consider following options to reduce its costs and increase its profits:
1. It can reduce its fixed costs by moving to a place with less rent or reduce its number of employees to reduce its expenses on wages.
2. It can reduce its variable costs by reducing the wages paid to its employees by reducing the working hours and number of work days.

3. It must have noted that it cannot reduce the number of employees and the location of the Cafe is good for business.

Before making the right choice the level of sales on weekends and peak hours on weekdays need to be determined based on the one month sales data.
- Now since the Cafe decided to remain closed on weekends shows that its sales on weekends was very less compared to the weekdays and hence not very profitable compared to the costs incured.
- Also on the weekdays the business hours are shortened depending on the peek hours for the costumers and hence again reducing the variable costs.