Opportunity Costs . Two graduate business students are considering opening a ful
ID: 345571 • Letter: O
Question
Opportunity Costs. Two graduate business students are considering opening a full-service car wash in Greenville, North Carolina, after graduation. This is an alternative to employment with a local manufacturing firm where they would each earn $72,000 per year. A fully equipped facility can be leased at a cost of $32,000 for the year. Additional projected costs are $15,000 for overhead, and $5 per automobile for materials and supplies. Full detail automobile cleaning would be priced at $25.
A.
What is the accounting cost function for this business?
B.
What is the economic cost function for this business?
C.
What is the economic breakeven number of units for this operation? (Assume a $25 price and ignore interest costs associated with the timing of the lease payments.)
A.
What is the accounting cost function for this business?
B.
What is the economic cost function for this business?
C.
What is the economic breakeven number of units for this operation? (Assume a $25 price and ignore interest costs associated with the timing of the lease payments.)
Explanation / Answer
A. Cost Function = Fixed plus Variable Cost
So, the cost function for a year can be calculated as
F= $32,000 + $15,000+ $5*N
where N is the number of vehicles serviced in a year
B. Economic Costs = Explicit+Implicit Cost (Opportunity Costs)
= $32,000 + $15,000+ $5*N + ($72,000*2) = $191,000 + $5*N
where N is the number of vehicles serviced in a year
C. Break even point can be calculated as where Revenue = Costs
$32,000 + $15,000+ $5*N = $25*N
$47,000=$20*N
N=2350
Thus, at 2350 automobiles per year, it would be break even.
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