Final answer:
To determine the target cost, add the desired return from the investment to the initial investment and subtract this from the expected revenue from meals. The owner's expectations are not feasible in this scenario as they lead to a loss, indicating the need for adjustments in pricing, sales volume, or return expectations.
Step-by-step explanation:
First, to determine the target cost for First Avenue Restaurant for 40,000 meals, we will need to calculate the desired return from the investment. With an initial investment of $1,250,000 and a desired rate of return of 8%, the owner expects to earn an additional $100,000 ($1,250,000 x 0.08) on top of the initial investment. To find the target cost, we need to add this desired return to the initial investment, and subtract this total from the expected revenue from selling 40,000 meals at $15.99 per meal.
The expected total revenue from the meals is $639,600 (40,000 meals x $15.99 per meal). So, the total cost that the restaurant can afford in order to meet the owner's expectations (target cost) would be the total revenue minus the sum of the initial investment and the desired return.
The calculation is as follows:
- Desired return on investment: $1,250,000 x 0.08 = $100,000
- Total amount owner expects (Investment + Return): $1,250,000 + $100,000 = $1,350,000
- Total revenue from meals: 40,000 x $15.99 = $639,600
- Target cost = Total revenue - (Investment + Return) = $639,600 - $1,350,000
However, since the total amount the owner expects is greater than the revenue from selling the meals, this scenario would result in a loss rather than a profit, and thus it is not financially feasible without adjusting some of the variables such as meal price, number of meals sold, or reducing the initial investment or the desired rate of return.