Barb and Bob (BB) left their jobs to start a bakery in downtown Cary in 2010. Barb used to be an accountant and made $75,000 a year; Bob was a gym teacher at Cary High and made $60,000.

The bakery took in $350,000 in revenue each year between 2015 and 2019. BB took out a loan in 2010 for $100,000 that they used to buy equipment and remodel the space where the bakery is located. Their annual loan payments are $10,000; those payments will continue through 2025. They used their house as collateral for the loan, so failure to make their loan payments would mean losing their house.

Other annual costs related to the bakery’s operation between 2015 and 2019 were as follows:

Rent 20,000

Supplies 50,000

Utilities 10,000

Labor 80,000

Taxes 30,000

All the labor costs are hourly and do not include any of the time BB spend running the bakery. BB’s income as bakery owners depends directly on the bakery’s profitability.

a) What are the annual accounting costs of BB Bakery? What are the accounting profits?

b) What are the economic costs of BB Bakery? What are the economic profits?

c) Which of these costs are fixed? variable? sunk?

d) Based on the information above, was it wise for BB to have operated the bakery between 2015 and 2019?

e) When the pandemic hit in 2020, revenue at BB Bakery dropped by 50 percent. Suppose now that it is late December 2020. BB has two options looking forward: (1) take advantage of the labor shortage and return to their old jobs or (2) accept $60,000 in pandemic relief support from the federal government, enough to cover 75 percent of their labor costs. If they take the pandemic support, they must keep all employees on payroll for the same hours as in 2019. If they keep operating, the store hours would be the same, but the number of baked goods sold would still be 50 percent lower than before the pandemic. They estimate that their tax bill would fall to $15000. Which of the two options is in BB’s best economic interest? Explain your answer.