Question

Suppose you have a brilliant idea for starting a small business. For the sake of simplicity, assume the business is a small, service-oriented business like a coffee shop, hair salon, etc. selling a single product. The only problem…you need financial capital. In order to acquire some funds to start your business, you decide to run some calculations using Microsoft Excel on prospective profitability to show the bank and potential investors.

Your assignment: In the form of a short business report, describe, estimate and compute the short-run costs for your business for a variety of production levels. You should also calculate the resulting profit for each of your production levels based on your best guess for the market price of your product. Please comment on the business’s prospective profitability. Try to keep the costs as high-level as possible; for example, instead of listing pepperoni, dough, and sauce separately, have a single cost item for cost of goods sold.

In order to complete this assignment you will have to:

• Briefly describe your business and the primary costs associated with running your business.

• Determine/estimate a production function that exhibits diminishing marginal product of labor (educated guess, I’ve given you an example in the excel table u). Assume that any physical capital is fixed (e.g. number of machines, buildings, etc.) since we are focusing on short-run costs.

• Identify and Estimate fixed cost for all production levels (educated guess)

• Identify and Estimate variable cost for all production levels (Variable costs primarily come from labor and materials. This works best if you have a simple per-worker labor cost and a per-unit material cost).

• Estimate the market price for one unit of your product (educated guess)

• Compute total cost for each production level

• Compute average cost for each production level

• Compute marginal cost for each production level

• Compute the profit for each production level

Answer 1

The business idea I choose is Hot Dog food truck .

Primary costs :-

NON - RECURRING COSTS :-

Non Recurring costs are one time costs , which are incurred once at the starting of business . These are non - repetitive costs .

1) Business idea planning .

2) Purchase of Food truck .

3) Cooking appliances costs .

RECURRING COSTS :-

Recurring costs are those costs who have a repetitive nature which means they keep occurring at regular intervals for smooth running of the business.

4) Innovation costs .

5) Raw Materials

6) Salaries

OVERHEADS :-

7) Rents

8) License fees

9) Freebies

10) Other supplies (excluding raw materials )

Fixed Capital :-

Nature	Cost
Food truck	$10000
Business idea planning	$50
Appliances and utensils	$3000
Total	$13050

Fixed Cost :-

The fixed cost of total business is $13050 .

1) The Break-even point at which the fixed costs will be covered :-

13050/1.45 = 9000 units

2) Days to cover the fixed costs :-

8878/200 = 45 days or 1.5 month

Variable cost :-

Nature	Costs
Bun	10 cents
Fillings and Condiments	15 cents
Side serves	5 cents
Gas , temperature ,serving plate costs	5 cents
Salaries and Payroll	5 cents
Total	50 cents

Per day variable costs = 200 * 0.50 =$100

Per week variable costs = $100* 7 = $700

Per month variable costs = $ 100*30= $3000

Per year variable costs = $ 100* 365 = $ 36500

Total Cost :-

Let us consider that the person. Sells 200 hot dogs a day and he has made arrangements of all variable costs for an year .

Nature	Costs
Fixed costs	$13050
Variable costs	$ 36500
Total	$49550

Total hot dogs produced in an year = 200*365 = 73000 units

Per unit cost = 49550/73000 = 68 cents

Per unit fixed cost = 18 cents

Marginal Cost :-

1) Marginal cost of each unit till 99100 units is 68 cents .

2) After which it starts dropping .

Profit :-

The average selling price of A hotdog in Chicago is $1.45

1) Per unit cost till 99100 units ( which helps to cover complete fixed costs ) is 68 cents

Profit = 1.45- 0.68 = 77 cents

2) Once the complete fixed cost is covered

Profit = 1.45 - 0.50 = 95 cents

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