Mel Has a Neighborhood Grocery Store That He Would Like

question 66

Essay

Mel has a neighborhood grocery store that he would like to sell. Casey is interested in purchasing the business, but he is concerned because he knows that Mel has built up a lot of goodwill over the years, and he wonders whether Mel might not just open another store down the block and take all of the business from the old store with him. Casey asks for and receives from Mel a clause in the sale agreement that Mel will not open another grocery store within a 150-mile radius of the old store for a period of at least ten years.
a. What is this agreement called?
b. Is the negotiated clause a valid one? Explain why or why not.
c. What guidelines would a court ordinarily use in determining whether to enforce such a clause?

---

Definitions:

Variable Overhead Efficiency Variance

The difference between the actual and the standard (or expected) variable overhead costs based on the efficient use of the variable inputs.

Variable Overhead

Costs of indirect production materials or services that fluctuate with the level of production activity, such as utilities for a factory.

Direct Labor-hours

The amount of labor time spent by workers directly involved in the manufacturing process, restated as "The quantity of labor time directly utilized in producing goods."

Variable Overhead Efficiency Variance

The difference between the actual variable overhead based on the standard cost and the variable overhead applied to production based on actual activity levels.