Have you ever walked into a restaurant during lunch downtown and found it almost

Question

Have you ever walked into a restaurant during lunch downtown and found it almost empty? Or Flown on a flight with so many empty seats you could sleep horizontally on the two seats next to you without anyone waking you up? Or visited a miniature golf course in the summer resort community during some time of the season and you were the only few people there?    

1. Why does the restaurant even bother to stay open, if the revenue from the few customers could not possibly cover the cost of running the restaurant? Why do you think the restaurant still open even though it couldn't cover all its costs? (Hint: think about leverage and the various types of cost).    

2. In making the decision whether to open for lunch, what kind of costs must the restaurant consider in the decision making and why?    

3. Why do you think "Priceline.com" and other discounted hotel and concert ticket vendors manage to sell their ticket at such a lower prices compared to the airlines?

Explanation / Answer

1) Restaurant will see the overall and broader picture rather than daily or seasonal position. If annual revenue is sufficient to cover all its annual cost than its wise to continue with the restaurant and therefore restaurant stay open irrespective of seasonal and timing impact variations.

2) Here only avoidable cost will be considered in making the decision and accordingly all fixed cost and other unavoidable cost will be irrelevant and will not be considered.

3) They are able to sell at lower price because they negotiate the concessional price from airlines because of business commitmenet and operate with lower fixed cost and lower operating leverage and therefore theya re able to sell the tickets at comparatively lower prices.

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