Question

Giuseppe Siragusa Restaurant is a popular spot for families in the San Diego, CA area.  On a typical Friday night, the restaurant serves 190 people with an average bill of $54 per person.  On a typical night, the cost of unprepared food is $20 per person and the cost of beverages averages $16 per person.

Siragusa has been approached by the UCLA School of Business, who wishes to hold their accounting symposium at the restaurant.  Giuseppe Siragusa the owner, as agreed to charge UCLA $70 per person for food, wine and desserts for 175 people.  Furthermore, he estimates that the cost of unprepared food for the UCLA function will be $35 per person, with beverages costing $13 per person.  In order to accommodate the UCLA group, however, SIRAGUSA will have to close the restaurant for dinner on that night.  No additional staff will need to be hired to accommodate the group from UCLA.

REQUIRED

1. Is there an opportunity cost associated with doing the UCLA function?  Explain IN WORDS why or why not.

2. What's the "real cost" (as used in this course) of the UCLA function?  GIVE THE TOTAL COST, NOT THE PER-UNIT OR PER-MEAL). Hint:  What is the “Real Cost”?  The relevant outlay(per person) plus opportunity cost (CM per person).

3. Should SIRAGUSA accept the UCLA business? YES or NO and by how much (in dollars)?

4. List AND explain one qualitative factor that SIRAGUSA should consider before deciding whether or not to accept the UCLA function.

Answer 1

A.

Opportunity Cost = is the loss of profit by choosing one option from two or many options.

In this case, we can say the opportunity cost is loosing profit from 15 persons. Since the restaurant is serving average 190 people, but by choosing UCLA Function option, the restuarant has to loose the profit by not serving additional 15 people.

Per Member Profit (when no UCLA Function is there) = Average Bill - Cost of Unprepared Food - Cost of Beverages

= $54 - $20 - $16 = $18

Total Opportunity Loss = $18 * 15 = $270

Hence, by choosing UCLA Function Option, the restuarant will have to bear opportunity loss of $270.

B.

Calculation of Real Cost = Actual Cost for Guests Served + Opportunity Cost

When Restaurant selects UCLA Function , the real cost would be

= (Nos. of Guests (Cost of Unprepared Food + Cost of Beverages)) + Opportunity Cost

= (175 ($35 + $13)) + $270

= (175($48)) + $270

= $8,400

Hence, Real Cost is $8,400, when choosing UCLA Function.

C.

By Choosing UCLA Function, the restaurant will have benefit as follows:

Net Profit from UCLA Function - Net Profit from Normal Serving

Net Profit = Nos. of Guests (Average Bill - Cost of Unprepared Food - Cost of Beverages)

Net Profit from UCLA Function = 175 ($70 - $35 - $13) = 175 * 22 = $3,850

Net Profit from Normal Serving = 190 ($54 - $20- $16) = 190 * 18 = $3,420

Excess Gain while choosing UCLA Function= Net Profit from UCLA Function - Net Profit from Normal Serving

= $3,820 - $3,420 = $430

SIRAGUSA should accept the UCLA Function order, as it is giving addtional gain of $430.

D.

SIRAGUSA should except the order as it will serve only 175 people against regular serving of 190 people, which means SIRAGUSA can serve them better due to less numbers.

Also the cost of unprepared food while serving UCLA Function is $35 against regular serving cost of $20, which the food would be far better than regular.