Refer to Scenario 9.5 below to answer the question(s) that follow.
SCENARIO 9.5: Investors put up $520,000 to construct a building and purchase all equipment for a new restaurant. The investors expect to earn a minimum return of 10 percent on their investment. The restaurant is open 52 weeks per year and serves 900 meals per week. The fixed costs are spread over the 52 weeks (i.e. prorated weekly). Included in the fixed costs is the 10% return to the investors and $1,000 per week in other fixed costs. Variable costs include $1,000 in weekly wages and $600 per week for materials, electricity, etc. The restaurant charges $3 on average per meal.
-Refer to Scenario 9.5. The restaurant's weekly economic profit is
A) positive.
B) negative.
C) zero.
D) break-even.

Question

Quizplus · Accepted Answer

The restaurant's weekly revenue is $2,700 (900 meals x $3). Total weekly costs are $2,200 ($1,000 fixed costs + $1,000 wages + $600 materials). The economic profit is $2,700 - $2,200 = $500. However, the fixed costs include the 10% return to investors, which is $1,000 per week ($520,000 x 10% / 52 weeks), making the total weekly costs $3,200. Therefore, the economic profit is negative ($2,700 - $3,200 = -$500).