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

Answer 1

Step-by-step explanation:

Accounting profit

Revenue Pizza- 400000

Revenue beverage 190000

Total revenue 590000

Cost of sales

Wages (55000*2) 110000

Pizza ingredients 50000

Manager 75,000

Pizza baker (60000*3) 180000

Equipment 10000

Finance cost (50000*6%) 3000

Tuition fee 2000

Total expenses 430000

Accounting Profit 160000

Implicit cost

Salary forgone 80000

Rent forgone 12000

Interest on savings (110000*5%) 5500

Total 97,500

Economic profit =(160000-97500) =62500

I will advise John to return to the teaching Job as he earns more in salary than the economic profit of doing business.