1) Your family purchased 118 Mulberry Street, New York City in the late 19^th century (approximately 1882) when that area was known as "Little Italy" and the area was primarily the home for Italian immigrants. A member of your family has continuously owned that building since then. The original purchase price was $ 4,250. There has not been a mortgage on the building for many years.

2) Your immediate family now controls the building through inheritance. The only costs are building maintenance, taxes and insurance. The rent from the floors above street level provides sufficient income to pay all of the operating expenses of the building, and any overage goes to the senior members of the family.

3) You and your siblings decide that you want to go into the gifts and souvenir business. Based on the location of the building (just off the corner of Canal Street, which is the main traffic street for that area) you all feel that this business will produce significant profits.

4) After a few years in business, you and your two siblings are enjoying the fact that the business is very profitable, earning $ 300,000 per year in Net Pre-Tax Profits, which you split evenly as personal compensation as all three siblings spend most of their awake time on site, at the store.

5) Therefore each of you makes $ 100,000 per year.

a. You have calculated that each of you are working 50 weeks of the year, 7 days per week and approximately 14 hours per day. (98 hours per week.)

i. What is the hourly pay rate for the siblings? Calculate this two ways. REAL and NOMINAL.

1. Assume that all personal expenses such as transportation, meals and health care and personal insurance are paid by each sibling.

6) At the end of the fourth year, you read a write up on-line on something called "Economic Profits". Effectively, this method of profit calculation takes into account economic alternatives to current management financial decisions and compares what is to what could be.

7) Based on that you and your two siblings make the following analysis to calculate Economic Profits for your business.

8) ECONOMIC PROFIT CALCULATION:

a. First the Facts:

b. Current Rent (CR) for the ground floor space (1500 sq. ft.) = $ 0/Month = $ 0 annual rent

c. Market Rent (MR) for ground floor space is $ 150 sq. foot per year= $ 225,000 per year.

d. Current income (CI) per sibling = $ 100,000/yr. for a 7 day work week with 2 weeks' vacation (based on $ 300,000/yr. profit). (See Paras. 4 & 5 above).

e. Job replacement income (RI) per sibling (avg.) = $ 80,000/year for a 5 day work week for 52 weeks with two weeks paid vacation and a full range of health and insurance benefits paid for by the new employer.

i. Replacement Job requires 60 hours of work per week.

ii. Benefits are worth $ 20,000 per year with no employee contributions and no income tax impact.

iii. Everyone's tax rate is 50%.

iv. Replacement Job Benefits are tax-exempt.

HERE ARE THE QUESTIONS:

f. What is the ECONOMIC RENT OF THE STORE?

g. What is The ANNUAL ECONOMIC INCOME FOR THE THREE OF THEM (COMBINED) FOR THE ACTIVITY OF RUNNING THE STORE?

i. What about benefits?

h. What is the hourly wage differential?

WHAT IS THE ECONOMIC PROFIT (OR COST) OF THE SOUVENIR SHOP???

i. THIS IS FOR ALL THREE SIBLINGS

j. Create a line item analysis that includes all of the cost and income factors that you feel are important.

BASED ON THE ABOVE ANALYSIS, WHAT WOULD YOU DO AND WHY?

Do you need more information to make this decision and what are the risks involved with this decision??

Answer rating: 100% (QA)

To calculate the hourly pay rate for the siblings well need to consider both real and nominal values a Real Hourly Pay Rate To calculate the real hourly pay rate well divide the annual income by the t... View the full answer