Case 1 Penne Pesto

Penne Pesto is a small restaurant in the financial district of San Francisco. Customers order from a variety of pasta dishes. The restaurant has 50 seats and is always full during the four hours in the evening. It is not possible to make reservations at Penne, most guests show up spontaneously on their way home from work. If there is no available seat, guests simply move on to another place.

On average, a guest spends 50 minutes in the restaurant, which includes 5 minutes until the waiter has taken the order, an additional 10 minutes until the food is served, 30 minutes to eat, and 5 minutes to handle the check-out (including waiting for the check, paying, and leaving). It takes the restaurant another 10 minutes to clean the table and have it be ready for the next guests (of which there are always plenty).The average guest leaves $20 at Penne, including food, drink, and tip (all tips are collected by the restaurant, employees get a fixed salary).

The restaurant has 10 waiters and 10 kitchen employees, each earning $90 per evening (including any preparation, the 4 hours the restaurant is open, and clean-up). The average order costs $5.50 in materials, including $4.50 for the food and $1 for the average drink. In addition to labor costs, fixed costs for the restaurant include $500 per day of rent and $500 per day for other overhead costs.

The restaurant is open 365 days in the year and is full to the last seat even on week-ends and holidays. There are about $200,000 of capital tied up in the restaurant, largely consisting of furniture, decoration, and equipment.

a) How many guests will the restaurant serve on an evening?

b) What is the Return on Invested Capital for the owner of the restaurant?

c) Assume that you could improve the productivity of the kitchen employees and free up one person who would be helping cleaning up the table. This would reduce the clean-up to 5 minutes instead of 10 minutes. What would be the new ROIC?

d) What would be the new ROIC if over-head charges could be reduced by $100 per day? Answer this question independent of the previous question.