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

Question

Have you ever walked into a restaurant during lunch in 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 one?
Q1. why does the restaurant even bother to stay open, because it might seem that 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's not covering all its costs
Q2. In making the decision whether to open for lunch, what kind of costs must the restaurant consider in the decision making and why

Explanation / Answer

1.
Restaurants incur fixed costs as well as variable cost. The fixed cost is fixed that will not come down even if the restaurant is closed. For example, it is the rent and employees’ salary that act as fixed cost among the many other fixed costs. Opening a restaurant will cause few customers to walk in and order for a meal. It is the variable cost that depends upon the no. of customers and it will incur when customers place the order. Thus, the variable cost is recovered. Besides, the price charged for the meal will be higher than the variable cost that can cover variable costs. Thus, restaurants opt to get open in the afternoon also.
Here, opening the restaurant at least covers the variable cost that puts the restaurant operation above the shutdown point. It makes restaurant to keep their operations running in the afternoon also.

2.
Restaurant will consider variable cost, including variable overheads also. If revenue received is greater than or equal to the variable cost of operation in the afternoon, the restaurant will get open for lunch. If revenue received is less than the variable cost, then it is below the shutdown point and restaurant will be closed in the afternoon for lunch.

Considering shutdown point is necessary to continue the operation. If restaurant is unable to cover the variable cost, then continuation of operation will only increase the losses. Thus, restaurant has to do the above mentioned analysis of revenue and variable cost and take final decision.

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