Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 5, Problem 5.6IP
To determine
The break-even price.
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In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 10,000 room-nights, which cost $70 per room per night to service. You spent $25.00 million on the hotel in 2008, and your cost of capital is 10%. The current going price to sell the hotel is $20 million.If the estimated demand is 10,000 room-nights, the break-even price is $per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.)
You are planning to run a hot dog stand during a forthcoming fair. You originally estimated that you will generate sales revenue
of €2000 and you have already spent €1000 building the hot dog stand. The hot dog stand is nearly completed but now you
estimate total sales to be only €800 because the fair clashes with a major music festival in a nearby location. You can complete
the hot dog stand for another €300. Your decision rule should be to complete the hot dog stand as long as the cost to complete
the stand is less than
None of these answers
€500
€800
€100
€300
SITUATION: You are thinking about becoming a Paradise Coffee franchisee. Franchisees are offered a business specializing in producing an exclusive line of exotic coffee drinks (similar to Starbucks). Franchisees have had good success in towns without a Starbucks (Paradise franchises gross $220,000 sales on average per year, and you believe you can gross as much, too). You will have to pay Paradise Coffee, Inc., a franchise fee of $3,000 a year plus 2.5% of gross sales. You will also pay an annual National advertising fee of 3% of gross sales. Paradise requires that you use their logo-imprinted goods (plates, cups, napkins). They are purchased in bulk from Paradise and will cost you $40,000 per year. You also have to use their special Paradise Roast coffee beans, which cost $12.00 per pound. You estimate you will use 400 pounds of beans a year. Other food ingredients (syrups, biscotti, whipped cream, soft drinks, etc) will cost $18,000 a year. You will have to hire three…
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Managerial Economics: A Problem Solving Approach
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