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.