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Gilman's Café is a popular restaurant in a local tourist town. Sarah Gilman, who opened the restaurant five years ago, has seen it grow steadily. Currently, Gilman's is only open for dinner, but many of her regular customers have been asking Sarah to consider opening for lunch as well. Sarah has been talking to her accountant about the financial impact of the expanded services on the overall business. She knew that the café did not make much money and she was concerned that the new business might be too risky. The accountant asked her for her best estimates on the impact of the new business on revenues and costs. She had been thinking about this for some time and estimates that revenues would grow by about 25 percent. Food costs would increase by about 40 percent and labor costs by about 20 percent. Her rent would not change, but utilities would increase by about 25 percent. Other costs would increase by 15 percent. The salary she pays herself as manager of the café would not change. A few days later, her accountant stops by with the following estimated income statement assuming she adds the lunch business.
Problem 1: Based on the financial impact, should Sarah open the café for lunch?
Problem 2: Are there other factors she should consider?
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This question is from Essentials of Corporate Finance 8th Edtion. Please don't copy & paste answers that have previously been posted for the 7th edition as the figures have changed.
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