Fixed costs are costs that do not alter with a decrease or increase in the number of services and goods produced or sold. These are costs that the company has to pay independent of any particular activity done by the organization. Sweetgreen’s fixed prices include the compensations that are fixed given to workers irrespective of the hours they have worked (salaries). The other payment is the increasing cost charging to the expense of tangible assets (depreciation). The additional fixed cost is amortization, which is the process or action by which the initial price of the asset is gradually written off.
An overly optimistic sales estimate they could eventually hurt Sweetgreen when there a new competitor enters the market. This is because revenue has an unpredictable nature, and in this case, it may lead to a reduction in income from sales. An overly optimistic sales estimate may also hurt the company in terms of the cost of storage. The excess goods produced will eventually need space for storage because of uncertainties in the market. The company will, therefore, be forced to add additional warehouses to store products, which comes at a cost. The excess estimate may also force the company to sell at a lower price to get rid of excess products leading to little profit. It may also lead to food produce being expired, which will hurt the company.
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The cost volume profit analysis will help Jon, Nate, and Nic in managing Sweetgreen by providing operating leverage. Operating leverage explains how a company’s structural cost is made up of the process of fixed cost. This is significant because the fundamental value has a direct connection to the growth level and profit a firm has. It will also help in the management of income tax benefits. It will help the managers in forecasting the future of the business and the preparation of budgets.
