1. Sally is considering opening a beauty salon. She anticipates the following an
ID: 1152369 • Letter: 1
Question
1. Sally is considering opening a beauty salon. She anticipates the following annual costs: Sally's Annual Costs Additionally, Sally is withdrawing S34,000 from her Furniture: Equipment: $20,000 $14,000 $12,000 | savings account that pays 4% interest per year to purchase the furniture and equipment; she will quit her Rent: Coloring products: Styling products current job that pays $25,000 per year. She expects total revenues from the new business in the first year to be $70,000. Calculate the following: $4,000 a. Explicit costs (list the items). b. Implicit costs (list the items) c. Accounting profit d. Economic profit. Given this first-year information only, should Sally open a salon? e.Explanation / Answer
a. Explicit costs are those which are directly paid out cost
Explicit Costs
Furniture
20000
Equipment
14000
Rent
12000
Coloring Products
6000
Styling Products
4000
Sub Cost
56000
b. Implicit costs are those which are forgone costs
Implicit Costs
Salary
25000
Own investment
35360
Sub Cost
60360
Total Cost = 116360
c. Accounting Profit = Revenues - Explicit costs = 70000-56000=14000
d. Economic Profit = Revenues - Total costs = 70000-116360=-46360
e. Since the economic profit is negative it is better for Sally to continue to work than openning a salon
Explicit Costs
Furniture
20000
Equipment
14000
Rent
12000
Coloring Products
6000
Styling Products
4000
Sub Cost
56000
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