You have the opportunity to get a VEGGIE Café 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-Chicken’s 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. You will have to pay two types of advertising expenses: 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 estimated gross sales greater than $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 will have to be invested in the business (thus you will forego the 5% per annum interest you now earn on this). 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 explicit estimated
You have the opportunity to get a VEGGIE Café 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-Chicken’s 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. You will have to pay two types of advertising expenses: 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 estimated gross sales greater than $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 will have to be invested in the business (thus you will forego the 5% per annum interest you now earn on this). 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 explicit 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-Chicken’s salary and bonus, which becomes part of the implicit costs of owning your own business. Another implicit cost is that you estimate you must earn $5,000 more than you earn now at Stick-e-Chicken to compensate you for the additional responsibility of your own business.
d. Do you project any economic profit? How much?
e. How much is the implied bank loan based on the above information?
f. From the economic profit viewpoint, would this be a viable business to start? Explain:
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