Question

You have the opportunity to get a VEGGIE Café franchise (this specializes in BOCA veggie Burgers and other heart-healthy fast foods). You now manage three Big Bird Stick-e-Chicken shops for another owner, and feel you are ready to be your own boss. You estimate your VEGGIE will gross $250,000 in annual sales. You will have to pay Veggie, Inc., an annual franchise fee of $5,000 plus another 3% of your gross sales. Advertising expenses have two parts: local advertising (which will cost $7,000 a year) and your share of National advertising (which will be 2% of gross sales). A store location (formerly a Burger Hut) is available for $6,000 a year plus a yearend rent bonus of 2% of gross sales in excess of $40,000. You will have to borrow money from a bank at 9% per annum (which will cost you $13,500 a year in interest). Your life savings of $20,000 (now earning you 5% per annum in interest) will also have to be invested in the business. 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. Other estimated annual expenses are: utilities $12,000; labor $50,000; food ingredients $60,000; maintenance $9,600; liability insurance $3,000. Stick-e-Chicken pays you $12,000 a year wages plus a yearend bonus of 1% of their gross sales (last year their sales totaled $700,000). Of course you will give up Stick-e-Chicken’s salary and bonus. Treat this as an additional implicit cost: Your friends tell you that you must earn $10,000 more than you now earn at Stick-e-Chicken to compensate yourself for the extra stress and strain of owning your own business.

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

2. What is the accounting profit you project for your business?  

3. What is the total implicit cost you estimate for your venture? Itemize in detail.

Answer 1