Sandwich Sales

A Crisis for the Livoria Brothers

In January 2012, a customer in Location 2 slipped on the floor and fell down the stairs on his way to the bathroom. He hit his head extremely hard and sustained serious injuries. He was subsequently hospitalized for three months, and during this time doctors determined that his short-term memory had been permanently impaired by the accident. By the end of 2012, the family of the injured young man brought legal action against Livoria Sandwiches Inc. and won a decision in court. The decision was that Livoria was to pay $750,000 in damages, of which only $250,000 would be covered by the general liability insurance policy. The contingent liability was booked in 2012, but the judge ordered that full compensation be paid by May 2015. Even though sales were not adversely affected, the brothers took this very seriously and took corrective action immediately by hiring a safety contractor who coated the floor with a thin, non-skid floor treatment which would greatly reduce the likelihood of this happening again. The brothers had to take a pay cut just to keep cash flow moving, as their preference is not to borrow from the open line of credit they have access to at the bank.

Finally, in 2012, Livoria Sandwiches Inc. was audited and found to still owe $22,500 in back taxes. This amount is due in the first quarter of 2013.

The next day, Paul and Sam had a heated discussion about the business:

Paul: Sam, we need to do something to shake things up around here.

Sam: Why? We’re profitable. We had the lawsuit, and while we’ll be paying that out in instalments over the next three years, it hasn’t affected our reputation. Customers keep coming back and they like our custom-made sandwiches. I think we have a good thing going here and any changes should be minimal.

Paul: Sam, the area is building up and soon there will be much in the way of competition. We need to be realistic and realize we may lose some of our market share. We need to consider...