Three graduate students are considering opening a fruit smoothie stand in the Ha
ID: 1254833 • Letter: T
Question
Three graduate students are considering opening a fruit smoothie stand in the Harbor Springs, MIchigan, resort area during their summer break. This is an alternative to summer employment with a local firm, where they would each receive $6,000 over the 3-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional projected costs are $1,000 for insurance and $3.20 per unit for materials and supplies. Their fruit smoothies would be priced at $5 per unit.A.) What is the accounting cost function for this business?
B.) What is the economic cost function for this business?
C.) What is the economic break-even number of units for this operation? (Assume a $5 per unit and ignore the interest costs associated with the timing of the lease payments.)
Explanation / Answer
A. This is all our explicit costs, therefore, facility for 8000 project cost for 1000 3.2 per unit we have 8000+1000+3.2x=9000+3.2x for our accounting cost B. our economic cost is accounting cost + opporunity cost, which is the cost we had to forgo in order to open the smoothie business. This is 6000*3+9000+3.2x=27000+3.2x C. break even is 27000+3.2x=5x now we solve for x 27000=1.8x x=15000 This is the number of smoothies that must be sold in order to break even