Rick’s English Hut (Rick’s) is a restaurant located in North Myrtle Beach, South Carolina on a saltwater marsh, surrounded by stately oak trees. Rick’s appetizers and entrees run the gamut, from tasty burgers and sandwiches to authentic Mexican plates and succulent ribs. Rick’s also has two bars that feature a dozen beers on tap and a wide-variety of wines and mixed drinks. With 15 televisions and seating for 250 patrons, Rick’s is the place to enjoy good food and warm hospitality with friends while watching your favorite sports team.

For the most recent month, Rick’s generated $60,000 in revenue, 55% of which came from the sale of alcoholic beverages and 45% of which came from the sale of food items. On average, alcoholic beverages sell for $4 and have a variable cost of $2; the average food item sells for $5 and has a variable cost of $4. Rick’s fixed costs for the month totaled $10,950.

Rick’s recent operating results present the proprietors with a dilemma. Specifically, for state licensing purposes Rick’s currently is classified as a “restaurant” and, as such, has the appropriate liquor license associated with this status—Class B. With a Class B liquor license, Rick’s is allowed to sell alcohol on the premises. However, alcohol sales must not exceed 50% of total revenue—otherwise Rick’s would be classified as a bar, a classification that requires a Class A liquor license. Currently, Rick’s pays $150 per month for its Class B liquor license; this cost is included in the fixed costs of $10,950 above.

Rick’s proprietors would have to pay an additional $850 a month for a Class A liquor license. Furthermore, Rick’s liquor liability insurance premiums would increase due to the increased liabilities associated with a higher proportion of alcohol sales (e.g., increased possibility of injury on the premises due to inebriation, increased chance of serving alcohol to minors, and so on). Rick’s insurance provider has informed the proprietors that their insurance premiums will increase by $318 per month if the establishment is licensed as a bar rather than a restaurant.

The South Carolina State Liquor and Alcoholic Beverage Control Agency closely monitors alcohol consumption in the state and has informed Rick’s that if it continues operating at the current sales mix level, Rick’s will need to operate under a Class A license. The agency has informed Rick’s that it will not impose any penalties on the restaurant as a result of the most recent month’s operating performance. The agency has, though, informed Rick’s that it needs to get its business in order starting this month. In terms of moving forward, the proprietors of Rick’s have discussed the following three options.

• Option 1: Change the licensing status of the establishment from restaurant to bar. This option would entail obtaining a Class A liquor license and paying the increased monthly licensing fees and insurance premiums. Rick’s would plan on selling alcohol and food at their current sales-mix percentages and levels (i.e., total revenue and the proportion associated with food and alcohol would not change).

• Option 2: Close the restaurant one-half hour earlier each night. This option would reduce alcohol sales such that alcohol sales exactly equal the current level of food sales (i.e., the revenues from both products would be equal). In addition, it would reduce Rick’s fixed costs by $450 per month. Finally, Rick’s would continue to operate as a restaurant under its Class B license.

• Option 3: Offer a brunch on Saturday and Sunday mornings (no alcohol would be served at the brunch). To ensure that revenues from the brunch are sufficient to bring up food sales to equal current alcohol revenue, Rick’s would need to price each brunch at $4. Unfortunately, Rick’s has determined that the variable cost of offering the brunch (including labor, food, etc.) will be $4.08 per brunch and that fixed costs will increase by $105 per month. However, a benefit of offering the brunch is that Rick’s could continue to operate as a restaurant under its Class B license.

Rick seeks your expertise in evaluating the efficacy of each option.

Required:

a. Calculate Rick’s profit and breakeven point in revenue for the most recent month (i.e., before considering the options).

b. Calculate Rick’s monthly profit and breakeven point in revenue under option 1.

c. Calculate Rick’s monthly profit and breakeven revenue under option 2.

d. Calculate Rick’s monthly profit and breakeven revenue under option 3.

e. Prepare a brief paragraph or two discussing the key insights Rick’s has learned. Can you link these insights to some commonly observed business practices? Try listing some examples.