Show Your Work In Detail You have the opportunity to get a VEGGIE Caf franchise (this specializes in BOCA veggie Burgers and other heart-healthy, non GMO 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 you can gross 70% of Stick-e-Chickens gross sales (which last year totaled $600,000). You will have to pay Veggie, Inc., an annual franchise fee of $1,500 plus another 4% of gross sales. Advertising expenses have two parts: local advertising (which will cost $6,000 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 only $6,000 a year plus a yearend rent bonus of 1% of gross sales in excess of $60,000. You will have to borrow money from a bank at 10% per annum (which will cost you $18,500 a year in interest). Your life savings of $50,000 (now earning you 5% per annum in interest) will also have to be invested in the business. NOTE: neither the principle you borrow from the bank nor the $50,000 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: food ingredients $174,000; hired labor $144,000; utilities $24,000; equipment maintenance $6,000; liability insurance $8,000. Stick-e-Chicken pays you $30,000 a year base salary plus a yearend bonus of 3% of their gross sales. Of course you will give up Stick-e-Chickens salary and bonus, which becomes part of the implicit costs of owning your own business. Moreover, you (implicitly) estimate you can earn $5,000 more than you earn now at Stick-e-Chicken to compensate you for the additional responsibility of your own business.

Please advise for the following:

e. How much is the implied bank loan based on the above information?

f. From the profit viewpoint, would this be a viable business to start? Explain:

Previous information:

Gross sales = 70% of 600000 = 420000

Annual franchising fee = 1500+ 4% of 420000 = 1500+16800 = 18300

National advertising expense = 2% of 420000 = 8400

Rent of store = 6000+1% of (420000-60000) = 6000+3600 = 9600

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

Explicit cost = franchise fee+local and national advertising expense+rent+interest on loan+utilities+labor+food+maintenance+liability insurance

=18300+6000+8400+9600+18500+24000+144000+174000+6000+8000

=416800

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

Accounting profit= total revenue - explicit cost

=420000-416800

=$3200

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

Implcit cost = interest foregone on savings+salary foregone

=(5% of 50000)+(30000+3%of 600000) = 2500+48000 = 50500

d. Do you project any economic profit? How much?

Economic profit = Total revenue - explicit cost-implicit cost

= 420000-416800-50500

= -$47300