Tom has been running a small business custom building touring bikes for friends

Question

Tom has been running a small business custom building touring bikes for friends for several years and has decided to expand his company to manufacture high-end bikes for a broader market. Tom thinks that he can sell as many as 75 bikes per year for $10,000 each, and with his cost of goods, shop rental, marketing and advertising costs of $525,000, will have a tidy sum left for himself. Tom thinks that at least half of his production will be sold to elite touring racers from France and Italy. Most of Tom’s bikes are manufactured to be custom fitted to the physical size and preferences of the racers. Tom has employed a number of people to help build his bikes.   Tom feels that his employees are not very skilled and that he needs to watch them every minute. He waits for them at the door to see when they come in and carefully times their breaks. He often yells at employees if he feels they are not working fast enough. Tom has come to you for advice on starting his company. Answer the test questions based solely on the information above.

a) You first calculate that Tom's total revenue will be: ____ and Based on that, you calculate that Tom's profit before tax will be: _____

b) Tom has been operating as a sole proprietor and has asked you to recommend a form of business ownership for his expanded company(e.g. C Corporation). What do you recommend to Tom and why?

Explanation / Answer

Total revenue=75*10,000=$750,000

Profit after tax=$750,000-$525,000=$225,000

I would recommend Tom that the employees should be given ownership of the company. By this way, Tom will get the employees nose in the game and they would be more motivated to work whith their money onvested. Further, Tom will get additional money for expansion.

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