You have been working for your brother (owner of a Down Under Sandwich Shoppe). The franchise company
Question:
You have been working for your brother (owner of a Down Under Sandwich Shoppe). The franchise company is now offering you a chance to franchise one of their new Big Bird Stick-e-Chicken shops (which sells their honey-roasted chicken-on-a-stick). You estimate your business can gross 45% of Down Unders $500,000 sales. Shop space is available between Down Under Sandwiches and Little Nero Salads that leases $8,400 a year plus a yearend rent bonus to the property owner of 3% of your gross sales in excess of $200,000. You intend to invest $20,000 of your own savings (which is presently earning you 6% per annum interest). A bank will loan you $100,000 (annual interest on this loan will be $7000). NOTE: neither the bank loan principle you borrow from the bank nor the $20,000 of your own money you invest is an explicit or implicit cost. However, the interest paid on the bank loan is explicit, and the interest foregone on your savings is implicit. You estimate that hired labor will cost you $70,000 a year, utilities $5,900 a year, and ingredients for the food $100,000 a year. You will have to pay Big Bird, Inc., an annual franchise fee is $3,000 plus 2% of your gross sales for the year. Another 1% of gross sales must be paid for national advertising. You are presently an Assistant Manager at Down Under earning $12,000 a year plus a yearend bonus of 2% of gross (a job you will have to give up), but you do not think you can earn more than this working for yourself.
What is the estimated explicit (accounting) cost of your proposed business? Itemize in detail.
What is the accounting profit you project for your business?
What is the total implicit cost you estimate for your venture? Itemize in detail.
Do you project any economic profit? How much?
What is the annual interestratethe bank will charge you for its loan?
From the profit viewpoint, would this be a viable business to start? Explain:
Expert Answer:
To calculate the estimated explicit accounting cost of your proposed business itemize the costs as follows 1 Shop space lease 8400 per year 2 Rent bon... View the full answer
