Refer to Scenario 9.10 below to answer the question(s) that follow.
SCENARIO 9.10: Investors put up $1,040,000 to construct a building and purchase all equipment for a new cafe. The investors expect to earn a minimum return of 10 percent on their investment. The cafe 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 $2,000 in other fixed costs. Variable costs include $2,000 in weekly wages, and $600 per week in materials, electricity, etc. The cafe charges $6 on average per meal.
-Refer to Scenario 9.10. In the short run, if the cafe decides to stay open, it will make weekly operating profits of
A) -$2,800.
B) $0.
C) $2,800.
D) $5,400.

Question

Quizplus · Accepted Answer

The weekly fixed costs include the 10% return on the $1,040,000 investment, which is $104,000 annually or $2,000 weekly (since $104,000 / 52 weeks = $2,000), plus an additional $2,000 in other fixed costs, totaling $4,000 in fixed costs per week. The variable costs are $2,600 weekly ($2,000 in wages + $600 in materials and electricity). The revenue from selling 900 meals at $6 each is $5,400 weekly. The weekly operating profit is calculated as revenue minus variable costs minus fixed costs: $5,400 - $2,600 - $4,000 = -$1,200. However, since the fixed costs already include the investors' expected return, we don't subtract it again. Therefore, the correct calculation for operating profit should only consider revenue and variable costs: $5,400 - $2,600 = $2,800.