Mama Bertolli makes biscotti using an age-old family recipe (they are hard Italian cookies eaten with espresso drinks).  Presently, you are an assistant manager of a Paradise Coffee Shoppe (similar to Starbucks).  The sales representative for Mama Bertolli suggests that you open a biscotti bakery and sell them wholesale to Paradise Coffee Shops.  You know that a typical Paradise shop grosses $220,000 on espresso drink sales per year, sells about 48890 such drinks per year and sells biscotti with about 25% of the drinks sold. You calculate you can wholesale them for $.90 each.  Therefore, you estimate you can sell about 12,222 x $.90 = $11,000 worth of the cookies to each typical Paradise Coffee shop per year.  There are presently sixteen Paradise shops, so selling to them means your biscotti factory could gross about $176,000 a year.  Next, consider manufacturing expenses.  You will have to pay Mama Bertolli, Inc.,  an annual franchise fee of 3% of gross sales.  You also have to pay an annual advertising fee of 1% of gross sales. Other annual costs are Ingredients $50,000, rent $12,000, labor $44,000, utilities $12,000 and liability insurance $2,000.  You will have to borrow $50,000 which will cost you about $5,000 a year in interest.  You will also have to invest your own savings of $90,000 in the business (on which you are presently earning 5.5% per annum interest).  NOTE: neither the bank loan principle you borrow from the bank nor the $90,000 of your own money you invest is an explicit or implicit cost.  However, the interest you pay on the loan is explicit and the interest foregone on your savings is implicit.  As a Paradise assistant manager, you now earn a base salary of $20,000 plus 4.5% of your store’s gross espresso drink sales.  Of course you will not longer receive this salary if you work for yourself.  Treat this as an additional implicit cost:  You calculate that you must earn $10,000 more than you are earning at Paradise Coffee to compensate yourself for the added stress and strain of owning your own business.

  1. What is the estimated explicit (accounting) cost of your proposed business?  Itemize in detail.
  1. What is the accounting profit you project for your business?
  1. What is the total implicit cost you estimate for your venture?  Itemize in detail.
  1. Do you project any economic profit?  How much?
  1. What is the annual interest rate the bank will charge you for its loan?

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

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