lankanprincess
New Member
John Jones owns and manages a café whose annual revenue is $50 000. Annual expenses are as follows:
Labour $20 000
Food and drink $5 000
Electricity $1 000
Vehicle lease $1 050
Rent $5 000
Interest on loan for equipment $10 000
a) Calculate John's annual accounting profit.
b) John could earn $10 000 per year as a recycler of aluminium cans. However, he prefers to run the café. In fact, he would be willing to pay up to $2 750 per year to run the café rather than recycle. Is the café making an economic profit? Should John stay in the café business? Explain.
c) Suppose the cafe's revenues and expenses remain the same, but recyclers' earnings rise to $11 000 per year. Is the café still making an economic profit? Explain.
d) Suppose John had not had to take out a $100 000 loan at an annual interest rate of 10 per cent to buy equipment, but instead had invested $100 000 of his own money in equipment. How would your answer to parts a) and b) change?
e) If John could earn $10 000 a year as a recycler and he liked recycling just as well as running the café, how much additional revenue would the café have to collect each year to earn a normal profit?
Labour $20 000
Food and drink $5 000
Electricity $1 000
Vehicle lease $1 050
Rent $5 000
Interest on loan for equipment $10 000
a) Calculate John's annual accounting profit.
b) John could earn $10 000 per year as a recycler of aluminium cans. However, he prefers to run the café. In fact, he would be willing to pay up to $2 750 per year to run the café rather than recycle. Is the café making an economic profit? Should John stay in the café business? Explain.
c) Suppose the cafe's revenues and expenses remain the same, but recyclers' earnings rise to $11 000 per year. Is the café still making an economic profit? Explain.
d) Suppose John had not had to take out a $100 000 loan at an annual interest rate of 10 per cent to buy equipment, but instead had invested $100 000 of his own money in equipment. How would your answer to parts a) and b) change?
e) If John could earn $10 000 a year as a recycler and he liked recycling just as well as running the café, how much additional revenue would the café have to collect each year to earn a normal profit?