Please show all work so i can learn how you solved it. Thank you You own a Down

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Please show all work so i can learn how you solved it. Thank you

You own a Down Under Sandwich Shoppe that has gross sales averaging $400,000 a year. You pay $45,000 a year in interest on a business bank loan. You also invested $60,000 of your own money in the business (You were earning 6% per annum interest on your own money before you invested it). NOTE: neither the bank loan principle, nor the $60,000 of your own money is an explicit or an implicit expense. However, the interest paid on the bank loan is explicit and the interest foregone on your savings is implicit. An expense you will have to pay to Down Under, Inc., is a franchise fees of $2,000 a year plus 2% of your gross sales. Hired labor costs you $150,000 a year. Utilities cost $3600 a year. Food ingredients (pizza dough, meat, cheese, sauce, soft drinks, etc) cost $130,000 a year. Other explicit costs you anticipate are 1% of gross sales spent on advertising and income taxes of 2% of gross sales. Your shop is located in a building you own (but you formerly leased it for $12,000 a year which you no longer receive). You quit a good job as the manager of Ramani’s Pizzeria that paid you $35,000 a year, and feel that this is all you are worth.

What is the estimated explicit (accounting) cost of this business? Itemize in detail.

What is the accounting profit from the business?

What is the total implicit cost of this business? Itemize in detail.

Explanation / Answer

Question 1

Gross sales of proposed business = 45% of $500,000 sales of Down under = 0.45 * 500000 = 225,000

Following are the explicit cost of business -

Rent of shop = 8400 + (3% of gross sales) = 8400 + (0.03 * 225000) = 8400 + 750 = 9,150

Annual interest of loan taken = 7000

Annual franchise fee = 3000 + (2% of gross sales) = 3000 + (0.02 * 225000) = 3000 + 4500 = 7500

Paid for national advertising = 1% of gross sales = 0.01 * 225000 = 2250

Labor cost = 70000

Utilities = 5900

Ingredients for food = 100000

Calculate the total estimated explicit cost -

Total explicit cost = rent of shop + annual interest of loan taken + annual franchise fee + paid for national advertising + labor cost + utilities + ingredients for food

Total explicit cost = 9150 + 7000 + 7500 + 2250 + 70000 + 5900 + 100000 = 201800

The total estimated explicit cost of the proposed business is $201,800.

Question 2

Calculate the accounting profit -

Accounting profit = Gross sales - total explicit cost

Accounting profit = 225000 - 201800 = 23200

The accounting profit of proposed business is $23,200.

Question 3

Following are the implicit costs of the proposed business -

Foregone interest = 0.06 * 20000 = 1200

Foregone salary = 12000 + (2% of gross sales of Down Under) = 12000 + (0.02*500000) = 12000 + 10000=22000

Total implicit cost = Foregone interest + Foregone salary = 1200 + 22000 = 23200

The total implicit cost estimated for the venture is $23,200.

Question 4

Calculate the economic profit -

Economic profit = Gross sales - explicit cost - implicit cost = 225000 - 201800 - 23200 = 0

The economic profit is $0.

Question 5

Loan taken = 100000

Interest paid = 7000

Interest rate = 7000/100000 = 0.07 or 7%

The annual interest bank will charge for its loan is 7 percent.

Question 6

A business is said to be viable business if economic profit is either positive or zero.

In given case, economic profit is zero. This means both explicit and implicit costs are being recovered.

So, from profit pint of view, this would be a viable business to start.

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