Question

"I think we have to do it," said Paula, the director of operations for the five-unit Hungry Henry's pizza chain. Paula was talking to Henry Acosta, the chain's founder. Paula and Henry were discussing the fact that their competitors in the area had extended their hours of operation. Instead of closing at 9:00 or 10:00 PM as they had in the past, increasing competitors were extending their hours to midnight or even 2:00 AM. Since its founding 20 years earlier, the Hungry Henry chain units closed at 10:00 PM, even on weekends. "I don't know," replied Henry. "Our sales between 9:00 and 10:00 PM are a good bit lower already than they are between 6:00 and 8:00 PM. I'm not sure staying up until midnight will generate much more business. Or how much will ie cost us to do it? "Well," replied Paula, "I think it we don't do it, we are in danger of being left behind by the bug boys. And once customers get used to going somewhere else it can be hard to get them back, even though our product quality is much better than theirs!" What is the importance for Paula and Henry to understand the fixed operating costs as they consider whether to extend operating hours? What kinds of additional information do you think Paula and Henry need to consider?

Answer 1

Part A

As per the recent trends, many food chains are opening earlier and stay open late to gain more customers. Keeping a food chain/restaurant for a few additional hours would hardly impact fixed costs (for example Rent, Depreciation, Interest expense etc.), as these costs tend to remain constant irrespective of the level of production. Also, keeping a food chain open for a few additional hours is likely to attract higher number of customers, thus providing a boost to the revenue.

Part B

Some other factors which have to be considered in such a scenario are:

1. Variable Costs (such as staff salary, electricity bill, raw materials etc.) will be increased. Thus, one should analyse whether the incremental variable costs will be positively matched by a similar increase in the revenue as well.

2. Daily reporting system would have to be kept in place to verify whether the extended hours is seeing an increase in the business

3. Geographical Location: Whether the food store is located in an area which has a midday rush only or are late nights also busy? A food store nearby a college would attract late night customers.