Reference no: EM131579853

Where the Dough Goes . . .

No matter how harried Stan Hernandez feels as the owner of his own Subway restaurant, the aroma of his fresh-baked gourmet breads always perks him up. However, the sales generated by Subway's line of gourmet-seasoned breads perks Stan up even more.

Subway restaurants introduced freshly baked bread in 1983, a practice that made it stand out from other fast-food chains and helped build its reputation for made-to-order freshness. Since then Subway franchisees have introduced many types of gourmet seasoned breads-such as hearty Italian or Monterey cheddar-according to a schedule determined by headquarters.

Stan was one month into the "limited-time promotion" for the chain's new roasted garlic seasoned bread when his bake oven started faltering. "The temperature controls just don't seem quite right," said his employee and "sandwich artist," Rashid. "It's taking incrementally longer to bake the bread."

"This couldn't happen at a worse time," moaned Stan. "We're baking enough roasted garlic bread to keep a whole town of vampires away, but if we don't get it out of the oven fast enough, we'll keep our customers away!"

That very day Stan called his field consultant, Mariah, to discuss what to do about his bake oven. Mariah reminded Stan that his oven trouble illustrated the flip side of buying an existing store from a retired franchisee - having to repair or replace worn or old equipment. After receiving a rather expensive repair estimate and considering the age of the oven, Stan ultimately decided it would make sense for him to purchase a new one. Mariah concurred, "At the rate your sales are going, Stan, you're going to need that roomier new model."

"Wow, do you realize how much this new bake oven is going to cost me? $3,000!" Stan exclaimed while meeting with his cousin-turned-Subway-accountant, Lila Hernandez. "Yes, it's a lot to lay out, Stan," said Lila, "but you'll be depreciating the cost over a period of 10 years, which will help you at tax time. Let's do the adjustment on your worksheet, so you can see it."

The two of them were sitting in Stan's small office behind the Subway kitchen, and they pulled up this month's worksheet on Stan's Peachtree program. Lila laughed, "I'm sure glad you started entering your worksheets on Peachtree again! The figures on those old ones were so doodled over and crossed out that I could barely decipher them! We may need your worksheets at tax time."

"Anything for you," Stan said. "I may depreciate my bake oven, but my gratitude for your accounting skills only appreciates with time!"

Question

Answer the following: How do you think Lila got the information on the useful life of Stan's bake oven and the estimate for its residual value? Why do you think she gets her information from this particular source? If Stan uses a straight-line method of depreciation and Stan's bake oven has a residual value of $1,000, how much depreciation will he account for each year and what would the adjustment be for each month?

Explain since good accounting practices and data makes it possible for business owners to make informed choices, such as whether or not it makes sense to purchase a new bigger oven over repairing the smaller old one, why is it that so many business seem to make poor business choices?