Question

The owner of the Down Home restaurant is considering two ways to expand operations: open a drive-thru window or serve breakfast. There are increased annual costs with each option and a one-time cost-cited with drive- thru. Labor and marketing costs are annual costs and include new staff and more ads in local media Layout redesign is a onetime cost. Details are provided in the following table Down home restaurant costs Annual One time Labor Marketing Layout redesign Decision Drive thru window Breakfast 100,000 56,000 20,000 77,000 10,000 The forecasted increase in income is affected by whether a competitor opens a restaurant down the street or not. The manager currently believes that the competitor is unlikely to open a new restaurant. He estimates the probability to be 0.65. The following table provides estimates of increased revenue for each scenario. Down home revenue estimates Competitor Open (0.35) Not open (0.65) Decision Drive thru window Breakfast 220,000 120,000 260,000 200,000 The owner of the restaurant is focused just on next year. He, therefore, decided to simply add the one-time cost for the redesign to the annual labor and marketing costs. a) Calculate the net profit of each combination of decision and competitor action 121 What is the best alternative if no competitor opens nearby? What is the best alternative if a competitor opens nearby? b) 12)

Answer 1