Question

Sam lives in San Francisco and operates a small company selling drones. On average, he receives $849,000 per year from selling drones. Out of this revenue from sales, he must pay the manufacturer a wholesale cost of $390,000. He also pays several utility companies, as well as his employees wages totaling $359,000. He owns the building that houses his storefront; if he choose to rent it out, he would receive a yearly amount of $72,000 in rent. Assume there is no depreciation in the value of his property over the year. Further, if Sam does not operate the drone business, he can work as a programmer and earn a yearly salary of $25,000 with no additional monetary costs, and rent out his storefront at the $72,000 per year rate. There are no other costs faced by Sam in running this drone company.

Answer 1

Sam's current net income from running the drone business is $100,000, whereas he could earn $97,000 from programming and renting his storefront. He makes $3,000 more from his current business than the alternative option. This business analysis focuses on evaluating revenue, costs, and potential alternative incomes to ascertain the most financially advantageous option for Sam.

Step-by-step explanation:

The question involves business analysis and the concept of opportunity cost. Sam has to decide whether to continue running his drone business or to pursue an alternative of working as a programmer and renting out his storefront. We need to calculate the net income from his current business and compare it with the alternative option to determine which is more financially beneficial for Sam.

To calculate Sam's current net income, we subtract his costs from his revenues. His revenue from selling drones is $849,000 per year. The costs include the wholesale cost of the drones ($390,000) and payments for utilities and wages ($359,000). Without including potential rental income, Sam's net income from the drone business is $849,000 - ($390,000 + $359,000) = $100,000.

If Sam chooses to work as a programmer and rent his storefront, he would earn $97,000 ($25,000 from programming and $72,000 from renting). Comparing the two incomes, Sam makes $3,000 more by running the drone business than he would by working as a programmer and renting the space.