Ken's Cornerspot, a popular university eatery in a competitivemarket, has seating and staff capacity to serve about 600 lunchcustomers every day. For the past 2 months, demand has fallenfrom its previous near-capacity level. Concerned about hisdeclining profit, Ken decided to take a closer look at hiscosts. He concluded that food was the primary cost thatvaried with meals served; the remaining costs of 3,300 per day werefixed. With demand averaging 330 lunches per day for the past2 months, Ken thought it was reasonable to divide the 3,300 fixedcosts by the current average demand of 550 lunches to arrive at anestimate of $6 of support costs per meal served. Noting thathis support costs per meal had now increased, he contemplatedraising his meal prices.
a. What is likely to happen if Ken continues to recompute hiscosts using the same approach if demand decreases further?
b. Advise Ken on choosing a cost driver quantity forcomputing support costs per meal and explain why you advocate yourchoice of quantity.