5. Sally is considering opening her own beauty salon. She anticipates the follow
ID: 2495448 • Letter: 5
Question
5. Sally is considering opening her own beauty salon. She anticipates the following costs per year:
Furniture:
$20,000
Equipment:
$14,000
Rent:
$12,000
Coloring products:
$6,000
Styling products:
$4,000
Sally is withdrawing $34,000 from her savings account that pays 4% interest/year to purchase the furniture and equipment; she will quit her 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:
a. Explicit cost (list by item).
b. Implicit cost (list by item).
c. Accounting profit.
d. Economic profit.
e. Given this first-year information only, should Sally open a salon?5. Sally is considering opening her own beauty salon. She anticipates the following costs per year:
Furniture:
$20,000
Equipment:
$14,000
Rent:
$12,000
Coloring products:
$6,000
Styling products:
$4,000
Explanation / Answer
Explicit costs = salaries + supplies + rent + utilities + interest on the bank loan
Here, explicit cost would include Furniture costs+ Styling products cost+ Equipment costs+ rent+ coloring cost
= $20,000+ $14.000+ $12,000+ $6,000+ $4,000
= $56,000
Implicit costs = entrepreneur forgone salary
= $25,000
Accounting profit = TR - explicit costs
= $70,000- $56,000
= $14,000
Economic profit = TR - explicit costs - implicit costs
= $70,000- $56,000- $25,000
= $70,000- $81,000
= -$11,000
she should not open the salon because that would incur loss of $11,000
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