Question

A local restaurateur who had been running a profitable business for many years recently purchased a three-way liquor license. This license gives the owner the legal right to sell beer, wine, and spirits in her restaurant. The cost of obtaining the three-way license was about \(90,000, since only 300 such licenses are issued by the state. While the license is transferable, only \)75,000 is refundable if the owner chooses not to use the license. After selling alcoholic beverages for about one year, the restaurateur came to the realization that she was losing dinner customers and that her profitable restaurant was turning into a noisy, unprofitable bar. Subsequently, she spent about \(8,000 placing advertisements in various newspapers and restaurant magazines across the state offering to sell the license for \)80,000. After a long wait, she finally received one offer to purchase her license for \(77,000. What is your opinion of the restaurateur’s decisions? Would you recommend that she accept the \)77,000 offer?

Short answer

The restaurateur should accept the $77,000 offer.

Step-by-step solution

Explanation

• A local restaurant owner has purchased a$\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{000}$tripartite liquor license, but a$\mathbf{\$}\mathbf{75}\mathbf{,}\mathbf{000}$refund is only available if the local restaurant owner changes his mind about using the license. In this case, after selling alcoholic beverages for a year, their restaurant became unprofitable. For this reason, local restaurant owners have decided to sell their license for $\mathbf{\$}\mathbf{80}\mathbf{,}\mathbf{000}$with the help of various newspapers and restaurant magazines that cost about $\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{000}$across the state.

• The license was purchased for $\mathbf{\$}\mathbf{90}\mathbf{,}\mathbf{000}$and $\mathbf{\$}\mathbf{75}\mathbf{,}\mathbf{000}$is refundable, so local restaurant owners have already lost $\mathbf{\$}\mathbf{15}\mathbf{,}\mathbf{000}$and even $\mathbf{\$}\mathbf{8}\mathbf{,}\mathbf{000}$ads, You will lose a total of $\mathbf{\$}\mathbf{23}\mathbf{,}\mathbf{000}$. The loss of $\mathbf{\$}\mathbf{23}\mathbf{,}\mathbf{000}$is sunk cost. Sunk cost is a cost that is never refunded once it has been paid.

Conclusion

• Therefore, the local restaurant owner must accept the $77,000 offer. After deducting the amount spent on advertising ($8,000), local restaurant owners could have a net $69,000 and a loss of $21,000