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. In the long run, the restaurant will want to
A) operate and expand.
B) operate but not expand.
C) shut down but not go out of business.
D) go out of business.

Question

Quizplus · Accepted Answer

Given the costs and expected returns, the restaurant's total revenue is insufficient to cover both its variable and fixed costs, including the desired 10% return on the $520,000 investment. The fixed costs alone ($1,000 per week plus the 10% return on investment) exceed the revenue generated from selling meals, leading to a situation where the business is not sustainable in the long run.