Florence Is Considering Going into Business for Herself and Has

question 61

Essay

Florence is considering going into business for herself and has developed the following estimates of monthly costs and revenues to aid her in her decision-making process.She has decided to house the business in a building that she already owns,although she could rent the building to someone else for $1,000 per month.Estimated payments for utilities (electricity,natural gas,water,and telephone)are $475 per month.She will hire one employee at a total cost of $1,100 per month.Inventory is estimated to cost $2,800 per month.Finally,Florence earns $3,000 a month in her current job.
a.How much monthly revenue would Florence have to take in to earn 0 economic profit?
b.Assume that Florence has estimated her monthly revenue to be $9,000.In this case,Florence would earn an accounting profit (loss)of ________,and an economic profit (loss)of ________.
c.Assume instead that Florence does not own a building,and that she will have to rent a building for $1,000 per month (all other estimates remain the same).In this case (assuming estimated monthly revenue is still $9,000),Florence would earn an accounting profit (loss)of ________,and an economic profit (loss)of ________.

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Definitions:

Static Budget

A budget based on a fixed set of assumptions and output levels, not adjusting for changes in business activity.

Guest-Days

A metric used in the hospitality industry to measure the number of guests and the days they stay; calculated by multiplying the number of guests by the number of days they stay.

Total Overhead Cost

The sum of all indirect costs associated with manufacturing a product or providing a service, excluding direct labor and direct materials costs.

Supplies Cost

The expense associated with purchasing supplies necessary for a company's operations or manufacturing processes.