Pearl Asian Restaurant operates in the Hong Kong International Airport passenger terminal. It is about time for the restaurant to negotiation for a new lease for the coming year. The landlord offers the owner of the restaurant two options. The first option is a fixed lease with a rent of $97,500 per month. The second option is a variable lease with monthly rent to be paid at 18% of the revenue of the restaurant. The restaurant owner expects that the annual revenue would be $8,000,000 for the coming year.

To expand his business, the restaurant owner also considers of acquiring one of the following catering outlets in the airport. One is a bistro and the other is a cafe. The annual revenue of the bistro or the cafe is the same, i.e. $500,000 for the current year. The variable cost of the bistro is 40% of its revenue and its annual fixed cost is $200,000. The cafe has a variable cost of 35% of its revenue and an annual fixed cost of $225,000.

The restaurant owner thinks that if he purchases the bistro, he could reduce its variable cost to 32% of its revenue. If he purchases the cafe, he could save $30,000 a year on its fixed cost. In either case, he thinks he could raise the revenue by 40% in the coming year.

(a) Advise the owner of the restaurant which catering outlet he should acquire and the caution that he should take.