Doug and Walter started the DW Restaurant two years ago.They rented a building,bought equipment,and hired two employees to work full time at a fixed monthly salary.Utilities and other operating charges remain fairly constant during each month.
The business has grown steadily with average sales increasing 1% a month.This situation pleases both partners.However,they do not understand how sales can grow by 1% a month while profits are increasing at an even faster pace.They are afraid that one day they will wake up to increasing sales but decreasing profits.
Required:
Explain why the profits have increased at a faster rate than sales.Use the terms variable costs and fixed costs in your response.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Question

Quizplus · Accepted Answer

The Answer of Doug and Walter started the DW Restaurant two years ago.They rented a building,bought equipment,and hired two employees to work full time at a fixed monthly salary.Utilities and other operating charges remain fairly constant during each month.
The business has grown steadily with average sales increasing 1% a month.This situation pleases both partners.However,they do not understand how sales can grow by 1% a month while profits are increasing at an even faster pace.They are afraid that one day they will wake up to increasing sales but decreasing profits.
Required:
Explain why the profits have increased at a faster rate than sales.Use the terms variable costs and fixed costs in your response.
_____________________________________________________________________________________________
_____________________________________________________________________________________________

Doug and Walter Started the DW Restaurant Two Years Ago