Question

John was a high school teacher earning $ 80,000 per year. He quit his job to start his own business in pizza catering. In order to learn how to run the pizza catering business, John enrolled in a TAFE to acquire catering skills. John’s course was for 3 months. John had to pay $2,000 as tuition for the 3 months.

After the training, John withdrew $110,000 from his savings account. He had been earning 5 percent interest per year for this account. He also borrowed $50,000.00 from his friend whom he pays 6 percent interest per year. Further, to start the business John used his own premises. He was receiving $12,000 from rent per year. Finally, to start the business John uses $50,000 he had been given by his father to go on holiday to USA.

John’s first year of business can be summarised as follows:

Item Amount $
Revenue- Pizza Section 400,000
Revenue- Beverages Section 190,000
2 Cashiers (wages per worker) 55,000
Pizza ingredients 50,000
Manager 75,000
3 Pizza bakers (wages per baker) 60,000
Equipment 10,000

Based on your calculated accounting profit and economic profit, would you advise John to return to his teaching job? Show your work (10 marks)

Answer 1

John should continue with his catering business because accounting and economic profits from pizza catering are more than his annual salary from teaching.

Step-by-step explanation:

John can earn from teaching $80,000 annually

For starting business of pizza catering John will incur following expense

Tuition for catering skills $2,000

Opportunity cost for withdrew of funds ($110,000 * 5%) $5,500

Interest for Borrowing from friend ($50,000 * 6%) $3,000

Opportunity cost of Rent from premises $12,000

Total opportunity cost $22,500

Revenue:

Revenues from Pizza $400,000

Revenue from Beverages $190,000

Total revenue $590,000

Expenses:

Cashier wages ($55,000 * 2) $110,000

Pizza ingredients $50,000

Manager salary $75,000

Pizza bakers wages ($60,000 * 3) $180,000

Equipment $10,000

Total Expense $425,000

Net Income - Accounting Profit ($590,000 - $425,000) = $165,000

Less opportunity cost $22,500

Economic Profit $142,500