93 is a famous singer and is planning for opening a coffee shop in Hung Hom. To finance his business, he needs a starting capital of $1,400,000. He withdraws $700,000 from his savings account, which he could earn a saving interest rate of 3% a year. Besides, he borrows another half of the capital amount from the bank at annual loan interest rate of 5%. Outbreak of Covid-19 has pushed down the rent in Hong Kong. The monthly rent of this new shop is only $50,000 and the decoration cost is $200,000. The cost of equipment is $35,000, which is estimated to have resale value of $14,000 after a year of operation. Every month, the purchase costs of coffee beans and other raw materials are estimated at $60,000. The electricity and utility expenses are $4,000 per month. To operate his coffee shop, there are one shop manager and one shop assistant with total annual salary expense of $400,000. Theannualpromotionalexpenseis$20,000. Ashehasmorethan405,000fans,theestimatedannual revenue of his coffee shop is $2,000,000. Calculate 193’s annual explicit costs and annual implicit costs of operating his coffee shop. List the relevant items in your calculation and show your workings.
193 is a famous singer and is planning for opening a coffee shop in Hung Hom. To finance his business, he needs a starting capital of $1,400,000. He withdraws $700,000 from his savings account, which he could earn a saving interest rate of 3% a year. Besides, he borrows another half of the capital amount from the bank at annual loan interest rate of 5%. Outbreak of Covid-19 has pushed down the rent in Hong Kong. The monthly rent of this new shop is only $50,000 and the decoration cost is $200,000. The cost of equipment is $35,000, which is estimated to have resale value of $14,000 after a year of operation. Every month, the purchase costs of coffee beans and other raw materials are estimated at $60,000. The electricity and utility expenses are $4,000 per month. To operate his coffee shop, there are one shop manager and one shop assistant with total annual salary expense of $400,000. Theannualpromotionalexpenseis$20,000. Ashehasmorethan405,000fans,theestimatedannual revenue of his coffee shop is $2,000,000.
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Calculate 193’s annual explicit costs and annual implicit costs of operating his coffee shop. List the relevant items in your calculation and show your workings.
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