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Financial & Managerial Accounting
Found in: Page 846
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Sweetgreen, launched by entrepreneurs Nic Jammet, Jon Neman, and Nate Ru, is a fast-casual restaurant brand devoted to healthy salad choices. The company also sells T-shirts, hats, and other apparel.

Required

1. Identify at least two fixed costs that will not change regardless of how much salad Sweetgreen sells.

2. Sweetgreen is expanding. How could overly optimistic sales estimates potentially hurt its business?

3. Explain how cost-volume-profit analysis can help Nic, Jon, and Nate manage Sweetgreen.

  1. Two fixed costs include salary expenses and license fees.

  2. Overly optimistic sales will increase the cost of the business entity.

  3. It will help the business entity to identify the effect of the cost incurred by the business and identify the cost that is needed to be controlled.

See the step by step solution

Step by Step Solution

Step 1: Definition of Break-Even Units

Break-even units are the level of sales units at which the business is in a situation of no profit or loss.

Step 2: Identification of fixed costs

Two fixed costs that will not get affected due to the volume of sales are:

  1. Salaries expenses: The salaries paid to waiters and cooks.

  2. Any license fees paid for opening the restaurant.

Step 3: Effect of overly optimistic sales on the business

Overly optimistic sales will increase the cost of expenses such as payroll expenses, and the business entity will have a higher amount of ending inventory left with them, which will negatively affect the business entity.

Step 4: Importance of CVP analysis in the management of the business

  1. The business entity will be able to identify the effect of the variable and fixed costs on the business’s profit.

  2. The business will get information regarding the number of sales needed to cover all the costs incurred.

  3. It will help management avoid the cost that is not necessary to incur.

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