Question

A restaurant must determine whether to stay open an additional hour at night. The restaurant will earn $250 in revenue by staying open the extra hour. The accountant figures that the per hour costs of the restaurant are labor ($50), cost of food used ($120), electricity ($150), and building lease ($45). Assume the building lease cost per hour is calculated by taking the monthly lease cost and dividing by the number of hours in a month. The accountant further estimates that 80% of the electricity used in the extra hour will be used for the refrigeration of food to be sold the next day. What is the marginal or opportunity cost of staying open an extra hour? Should the restaurant stay open the extra hour?

Answer 1

We have been given the following information

Headings	Amount ($)
Revenue in the additional hour	250
Labor cost for the additional hour	50
Food cost for the additional hour	120
Electricity cost	150
Lease cost	45

For our analysis of marginal opportunity cost, we can discard the lease cost, as it will exist even when the restaurant is not opened for the additional hour.

Moreover, it is given that 80% of the electricity used in the extra hour will be used for the refrigeration of food to be sold the next day. So, for our analysis, the electricity cost is the following

Electricity cost = $(150×0.2)

Electricity cost = $30

So, the marginal or opportunity cost of staying open an extra hour is equal to the following

Opportunity cost = Labor cost + Food cost + Electricity cost

Opportunity cost = 50 + 120 + 30

Opportunity cost = $200

Since the opportunity cost is less than the revenue from staying open an extra hour, so, the restaurant should stay open for the extra hour.