Suppose that you have had a restaurant for the past 2 years. The first year was about what was expected (sales of \$200,000 for 300 days that you were open). Profits were fair, but a critical time for the restaurant is approaching. Demand for service on Friday and Saturday nights (biggest sales nights of the week) has exceeded the capacity to serve customers, and some have been turned away or decided to eat elsewhere. When the restaurant is serving at capacity (like on Friday and Saturday nights), you estimate that total sales would be \$600,000 per year.

Suppose that you have had a restaurant for the past 2 years. The first year was about what was expected
(sales of \$200,000 for 300 days that you were open). Profits were fair, but a critical time for the
restaurant is approaching. Demand for service on Friday and Saturday nights (biggest sales nights of the
week) has exceeded the capacity to serve customers, and some have been turned away or decided to
eat elsewhere. When the restaurant is serving at capacity (like on Friday and Saturday nights), you
estimate that total sales would be \$600,000 per year.
a.
b.
c.
d.

What is the restaurant?s design capacity utilization figure?
Is that good or bad given the nature of the weekend demand for restaurant business? Why?
What do you suggest be done to improve capacity utilization?
You have been considering building on an addition to the restaurant in anticipation that you
would have even greater demand in the future. Your decision is simple: expand the building or
remain the same size. However, you are not sure of the demand that will result after you expand.
Demand may increase quite a bit or be relatively flat. You estimate the probability of increasing
demand significantly at 30%, increasing modestly at 50% and staying the same at about 20%.
Estimated profits that would result (after amortizing the building expansion) at each demand
level is \$70,000 at significantly increasing demand; \$10,000 at modes increases in demand; and
a loss of \$20,000 if demand stays the same. What would be the expected profit of making the