You have been working for your cousin (owner of a Little Nero Caesar Salad franchise). The franchise company is now offering you a chance to franchise one of their new Big Bird Stick-e-Chicken shops (which will sell their honey-roasted chicken-on-a-stick). You estimate your Big Bird chicken shoppe can gross 60% of Little Nero’s annual $600,000 sales. Shop space is available between Down Under Sandwiches and Little Nero Salads that leases for $8,400 a year (but the property owner also wants an additional yearend rent bonus of 3% of your estimated gross sales over $300,000). You will have to invest $40,000 of your own savings (thus foregoing the 5% per annum interest this is presently earning you). A bank will loan you $100,000 (on which you will pay annual interest of $7,000). NOTE: neither the bank loan principle you borrow from the bank nor the $40,000 of your own money you invest is an explicit or implicit cost. However, the interest you pay on the loan is explicit and the interest foregone on your savings is implicit. Other estimate expenses are that hired labor will cost you $70,000 a year, utilities $4,600 a year, ingredients for the food $160,000 a year, and liability insurance $3,000 a year. You will have to pay Big Bird, Inc., an annual franchise fee of $3,000 cash plus 3% of your estimated gross sales for the year. Another 1% of gross sales must be paid for national advertising. You are presently an Associate Manager at Little Nero earning $30,000 a year (income you will have to give up). Finally, you want to earn $10,000 more than you presently earn at Little Nero, to compensate yourself for the extra stress of owning your own business (treat this as added implicit expense). a. What is the estimated explicit (accounting) cost of your proposed business? Itemize in detail. b. What is the accounting profit you project for your business? c. What is the total implicit cost you estimate for your venture? Itemize in detail. d. Do you project any economic profit? How much? e. What is the annual interest rate the bank will charge you for its loan? f. From the economic profit viewpoint, would this be a viable business to start? Explain:
You have been working for your cousin (owner of a Little Nero Caesar Salad franchise). The franchise company is now offering you a chance to franchise one of their new Big Bird Stick-e-Chicken shops (which will sell their honey-roasted chicken-on-a-stick). You estimate your Big Bird chicken shoppe can gross 60% of Little Nero’s annual $600,000 sales. Shop space is available between Down Under Sandwiches and Little Nero Salads that leases for $8,400 a year (but the property owner also wants an additional yearend rent bonus of 3% of your estimated gross sales over $300,000). You will have to invest $40,000 of your own savings (thus foregoing the 5% per annum interest this is presently earning you). A bank will loan you $100,000 (on which you will pay annual interest of $7,000). NOTE: neither the bank loan principle you borrow from the bank nor the $40,000 of your own money you invest is an explicit or implicit cost. However, the interest you pay on the loan is explicit and the interest foregone on your savings is implicit. Other estimate expenses are that hired labor will cost you $70,000 a year, utilities $4,600 a year, ingredients for the food $160,000 a year, and liability insurance $3,000 a year. You will have to pay Big Bird, Inc., an annual franchise fee of $3,000 cash plus 3% of your estimated gross sales for the year. Another 1% of gross sales must be paid for national advertising. You are presently an Associate Manager at Little Nero earning $30,000 a year (income you will have to give up). Finally, you want to earn $10,000 more than you presently earn at Little Nero, to compensate yourself for the extra stress of owning your own business (treat this as added implicit expense).
a. What is the estimated explicit (accounting) cost of your proposed business? Itemize in detail.
b. What is the accounting profit you project for your business?
c. What is the total implicit cost you estimate for your venture? Itemize in detail.
d. Do you project any economic profit? How much?
e. What is the annual interest rate the bank will charge you for its loan?
f. From the economic profit viewpoint, would this be a viable business to start? Explain:
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