Kim Hanson has just finished his first year as owner and manager of a new restaurant. His revenues, net of food and beverage cost (gross margin) were $250,000 and he paid his cooking and wait staff a total of $130,000. He also paid $50,000 for rent and utilities. Kim left his job of managing an Appleby’s restaurant, where he was paid an annual salary of $50,000, which is the typical salary for restaurant managers. He invested $200,000 of his own money (an inheritance from his aunt Hilda, which was in a mutual fund with an expected return of 12%) to buy the furniture and equipment for the new restaurant. Kim is depreciating these assets over a ten year period. This past year he spent $10,000 for repairs and other maintenance. He projects that he will usually spend this amount in the future on maintaining the restaurant’s fixed assets, and, if he does so, he could sell the furniture and equipment for an amount equal to his initial investment.
Kim expects that next year his gross margin will improve by 20% as the restaurant’s reputation grows, while his other costs will be the same. He has done so well that another restaurant owner has offered him a salary of $75,000 if he will manage the competing restaurant. If he accepts the job he would be required to close his restaurant, however.
For the questions below, please show your work.
a. What is Kim’s economic profit for the past year?
b. What is Kim’s anticipated economic profit for next year?
c. Should Kim accept the manager’s position at the competing restaurant? Explain your answer.
d. After making the calculations above you learn that Aunt Hilda’s bequest to Kim came with the stipulation that he "must use it to start his own business" and that if he failed to do so the inheritance would pass to his brother Victor. Would this new information cause you to re-assess your calculations? How and why?