Suppose That Mighty Mike's Sandwich Shop Was Started in 1998

question 52

Essay

Suppose that Mighty Mike's Sandwich Shop was started in 1998 and 100 percent of the $250,000 needed to start up the company was raised by selling shares of stock. In 2000, the company distributed its entire profit of $15,000 to shareholders. If the market interest rate is 5 percent, what is the level of economic profit earned by the firm's stockholders?

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Definitions:

Break-even Sales

The amount of revenue needed to cover both fixed and variable costs, resulting in no profit or loss.

Variable Cost

Costs that change in proportion to the level of goods or services produced, such as materials and labor directly involved in production.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, indicating the degree to which a company can increase profits by increasing sales.

Break-even Sales

The amount of revenue needed to cover both the variable and fixed costs of a business, resulting in zero profit or loss.