A Potential Entrepreneur Is Trying to Decide Whether to Open

question 91

Essay

A potential entrepreneur is trying to decide whether to open a new health spa.She presently makes $35,000 per year as an aerobics instructor and will have to give up this job if she opens the new health spa.If she chooses to open the spa, it will cost her $200,000 per year in rent and other operating expenses.
a.What are her accounting costs?
b.What are her opportunity costs?
c.How much would she need to make in revenues to earn positive accounting profits? Positive economic profits?

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Definitions:

Materials Quantity Variance

A financial metric used in cost accounting to measure the difference between the actual quantity of materials used in production and the expected quantity.

Cost of Goods Sold

The immediate expenses related to the production of a company's sold goods, involving materials and labor.

Labor Efficiency Variance

Labor efficiency variance is a measure of the difference between the actual hours worked by employees versus the standard or expected hours worked to produce a certain amount of goods.

Labor Rate Variance

The difference between the actual cost of labor and the expected (or budgeted) cost, used in managerial accounting to monitor labor cost efficiency.