Question

Taylor’s is a popular restaurant that offers customers a large dining room and comfortable bar area. Taylor Henry, the owner and manager of the restaurant, has seen the number of patrons increase steadily over the last two years and is considering whether and when she will have to expand its available capacity. The restaurant occupies a large home, and all the space in the building is now used for dining, the bar, and kitchen, but space is available on the property to expand the restaurant. The restaurant is open from 6 p.m. to 10 p.m. each night (except Monday) and, on average, has 29 customers enter the bar and 55 enter the dining room during each of those hours. Taylor has noticed the trends over the last 2 years and expects that within about 4 years, the number of bar customers will increase by 50% and the dining customers will increase by 20%. Taylor is worried that the restaurant will be not be able to handle the increase and has asked you to study its capacity. In your study, you consider four areas of capacity: the parking lot (which has 85 spaces), the bar (60 seats), the dining room (105 seats), and the kitchen. The kitchen is well-staffed and can prepare any meal on the menu in an average of 12 minutes per meal. The kitchen, when fully staffed, is able to have up to 20 meals in preparation at a time, or 100 meals per hour (60 min/12 min × 20 meals). To assess the capacity of the restaurant, you obtain the additional information:

Diners typically come to the restaurant by car, with an average of 3 persons per car, while bar patrons arrive with an average of 1.5 persons per car.

Diners, on average, occupy a table for an hour, while bar customers usually stay for an average of 2 hours.

Due to fire regulations, all bar customers must be seated.

The bar customer typically orders one drink per hour at an average of $9 per drink; the dining room customer orders a meal with an average price of $20; the restaurant’s cost per drink is $1, and the direct costs for meal preparation are $5.

Required:
1. Taylor has obtained construction estimates. To increase the capacity of the bar to 90 seats, the dining room to 125 seats, and the kitchen to 25 meals at the same time would cost $250,000, which Taylor could finance for $5,000 per month for the next 4 years. There would be no change to the parking lot. Given your analysis above, prepare a brief recommendation to Taylor regarding expanding the restaurant.

Answer 1

To submit our recommendation to Taylor, we have to calculate :

1) The capacity to serve the number of customer if expansion is not done.

2) The profit per hour if expansion is not done.

3) The profit per hour if expansion is done.

4) Then we need to calculate the extra amount earned per hour , if expansion is done.

5) Using the calculation in point 4 we will be able to calculate in how many years Taylor will be able to recover the cost of expansion if he decide to go for expansion.

Current Parking space is 85, in which a patrons coming to bar have on avergae 1.5 person per car i.e 2 car for every 3 people (3/2)

While for diners, the number of person per car is 3.

Now the existing customers for Bar=29 and Dining=55 per hour. The bar customer stays for two hours and dining customer on stays for one hour.

The number of bar customer expects to increase by 50% in four years i.e number of bar customer per hour= 43.5 ( 29*1.5)

The number of dining customer to increase by 20% in four years i.e the number of dining customer per hour=66

Number of car by bar member=43.5/1.5=29 ( bar people stays for stays for two hours and hence 29 customer will occupy for two hours) and its as equivalent to occupying 58 cars slots.

Number of car by diners member=66/3=22.

The capacity of car parking is 85 and parking space required is 80. Hence parking space is not constraint.

Now, Number of seats available for bar without expansion is 60 seats. As one bar customer seats for two hours, in fours hours taylor will able to handle 120 customers only i.e 30 customer per hour.

Number of dining room seats available is 105 seats.The number of meal that can be served in a hour is 100. As the dining customer takes an hour we will be able to handle 66 customer per hour ( total demand we will be able to handle).

Total profit=30*8 + 66*15 =$1230

Now, if taylor goes for expansion, the capacity for bar become 90 seats and capacity for dining room will be 125 seats.

The demand for bar=43.5 customers per hour and number of dining customer per hour=66

As the capacity of bar is 90, each bar customer takes 2 hours the bar capacity can occupy 45 customers. And dining capacity can occupy 125 customers. Hence now taylor can serve all the customer.

Total expected profit after increasing capacity ( per hour) =43.5*8 +66*15 =$1338

Increase in revenue per hour=$1338 - $1230= $108 per hour.

In four hours=$108*4= $432

Increase in revenue in a week=$432*6=$2592

Number of weeks it is required to cover the cost of expansion =$250000/$2592=96.45 Weeks

In terms of years it is =96.45/52 ( Number of weeks in a year)=1.85 years

Hence taylor will be able to recover his investment in 1.85 years i.e the payback period of investment is 1.85 years and hence taylor should go for expansion, keeping the deman in mind.

The payback period of the investment of expansion ( $250000) is 1.85 years and the tenure of finance is 4 years. Hence we recommend taylor should go ahead with the recommended expansion of the restaurant.