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 short run, if the restaurant shuts down, its losses will equal its ________ costs of ________.
A) variable; $1,600
B) total; $3,600
C) fixed; $1,000
D) fixed; $2,000

Question

Quizplus · Accepted Answer

In the short run, if the restaurant shuts down, its losses will equal its fixed costs. The fixed costs include the $1,000 per week in other fixed costs and the 10% return to the investors on their $520,000 investment, which is $52,000 per year or $1,000 per week ($52,000 / 52 weeks). Therefore, the total fixed costs are $2,000 per week.