Response to the following problem:
Capacity costs Ken's Cornerspot, a popular university eatery in a competitive market, has seating and staff capacity to serve about 600 lunch customers every day. For the past two months, demand has fallen from its previous near-capacity level. Concerned about his declining profit, Ken decided to take a closer look at his costs. He concluded that food was the primary cost that varied with meals served; the remaining costs of $3,300 per day were fixed. With demand averaging lunches per day for the past two months, Ken thought it was reasonable to divide the $3,300 fixed costs by the current average demand of lunches to arrive at an estimate of $6 of support costs per meal served. Noting that his support costs per meal had now increased, he contemplated raising his meal prices.
Required :
(a) What is likely to happen if Ken continues to recompute his costs using the same approach if demand decreases further?
(b) Advise Ken on choosing a cost driver quantity for computing support costs per meal and explain why you advocate your choice of quantity.