After graduation, you face a choice. One option is to work for a multinational consulting firm and earn a starting salary (benefits included) of $40,000. The other option is to use $5,000 in saving to start your own consulting firm. You could earn an interest return of 5 percent on your savings. You choose to start your own consulting firm. At the end of the first year, you add up all of your expenses and revenues. Your total includes $12,000 in rent, $1,000 in office supplies, $20,000 for office staff, and $4,000 in telephone expenses. What are your total explicit cost and total implicit costs?

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manhokwe tawandaLv10

28 Sep 2019

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Suppose you are considering starting your own consulting firm. You estimate if that if you did not start the firm, your starting salary at a job would be $40,000/yr. The revenues from this firm are expected to be $1,500,000. Some of the expenses you expect to encounter are $25,000 for an employee and operating costs (rent, supplies, utilities, etc.) of $500,000. To begin the business, you must borrow $100,000 from the bank and pay 8% interest on the loan, and also uses $50,000 of your own money that was in a savings account previously earning 2% interest. Equipment (computers, etc.) will cost $20,000.

a. Determine the pre-tax accounting profit of this firm.

b. Determine the pre-tax economic profit of this firm.

c. Which costs are explicit and which costs are implicit?

amaranthbat623

You have the opportunity to get a VEGGIE Cafe franchise (this specializes in BOCA Veggie Burgers and other heart-healthy fast foods). You now manage three Big Bird Stick-e-Chicken shops for another owner and feel you are ready to be your own boss. You estimate your VEGGIE will gross $250,000 in annual sales. VEGGIE annual franchise fees will cost $5,000 plus another 3% of your gross sales. Advertising expenses have two parts: local advertising (which will cost $7,000 a year) and your share of National advertising (which will be 2% of gross sales). A store location (formerly a Burger Hut) is available for $6,000 a year plus a yearend rent bonus of 2% of gross sales in excess of $40,000. You will have to borrow money from a bank at 9% per annum (which will cost you $13,500 a year in interest). Your life savings of $20,000 (now earning you 5% per annum in interest) will also have to be invested in the business. NOTE: neither the bank loan principal you borrow from the bank nor the $20,000 of your own money you invest is an explicit or implicit cost. However, the interest paid on the bank loan is explicit and the interest foregone on your savings is implicit. Other estimated annual expenses are: utilities $12,000; labor $50,000; food ingredients $60,000; maintenance $9,600; liability insurance $3,000. Stick-e-Chicken pays you $12,000 a year wages plus a yearend bonus of 1% of their gross sales (last year their sales totalled $700,000). Of course, you will give up Stick-e-Chicken's salary and bonus. You estimate you can earn $10,000 more than you now earn at Stick-e-Chicken to compensate you for the additional responsibility of your own business.

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?

rosewater-buffalo597

At the beginning of 2015, a computer programmer quit his job and gave up a salary of $75,000 per year. He started his own organic farm, Turnip Tomâs, Inc. An income statement for Turnip Tomâs is shown below:

		2015

Revenues		$ 89,000

Operating costs and expenses
Cost of products sold		$ 12,500
Selling expenses		$ 5,500
Administrative expenses		$ 5,200
Total operating costs		$ 23,200

Income from Operations		$ 65,800

Interest expense (bank loan)		$ 9,500
Legal expenses		$ 1,200
Income taxes		$ 22,000

Net income		$ 33,100

To get started, Tom spent $300,000 of his own savings to purchase land and equipment to be used for the farm. In 2015, Tom could have earned a 10 percent return by investing in stocks of other business with risk levels similar to his farm.

Answer the following questions using the information given above. Be sure to show each step of your calculations.

What are the total explicit costs for 2015?

What are the total implicit costs for 2015?

What are the total economic costs for 2015?

What is accounting profit for 2015?

What is economic profit for 2015?

Using only your analysis in question 1-5, would you say that Tom made a good decision to leave is job to start the organic farm? Explain.