Opportunity Cost/ short run cost
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8. Mr. Lee operates a green grocery in a building he owns in one of the outer boroughs of New York City. Recently, a large chemical firm offered him a position as a senior engineer designing plants for its Asian operations. (Mr. Lee has a master's degree in chemical engineering). His salary plus benefits would be $95,000 per year. A recent annual financial statement of his store's operations indicates the following:
Revenue $625,000
Cost of Goods Sold 325,000
wages of workers 75,000
Taxes, insurance, maintenance, and
Depreciation on building 30,000
Interest on business loan (10%) 5,000
Other miscellaneous expenses 15,000
Profit before taxes 175,000
If Mr. Lee decides to take the job, he knows that he can sell the store for $350,000 because of the goodwill built with a steady clientèle of neighborhood customers and the excellent location of the building. He would still hold on to the building, however, and he knows he could earn a rent of $50,000 on this asset. If he did sell the business, assume he would use some of the proceeds from the sale to pay off his business loan of $50,000. He could then invest the difference of $300,000 (i.e. 350,000 - 50,000) and expect to receive an annual return of 9 percent. Should Mr. Lee sell his business and go to work for the chemical company? In answering this question, also consider the following information:
a. In his own business, Mr. Lee works between 16 and 18 hours a day, 6 days a week. He can expect to work between 10 and 12 hours a day, 5 days a week, in the chemical company.
b. Currently, Mr. Lee is assisted by his wife and his brother, both whom receive no salary but share in the profits of the business.
c. Mr. Lee expects his salary and the profits of his business to increase at roughly the same rate over the next 5 years.
Justify your answer. A simple yes or no does not suffice need supporting numbers Is is worth Mr. Lee profit to accept the job at the chemical plants and figure out his lost wages or gain wages is accepted.
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Solution Summary
Business owner must decide whether he will recieve a better return by working for a chemical company.
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There are several different ways you can make this decision. For example, do you want to maximize the hourly wage of Mr. Lee, or his annual income? If he doesn't like working long hours, working for the chemical plant makes sense. On the other hand, if he feels that his brother really needs the work, he needs to keep the business. Also, can his wife get another job? You aren't given enough information to answer these questions, but you should include a paragraph in your answer that shows that you realize that without this information it is impossible to make a final ...
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