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Three college students consider the option of forming a lawn care and landscaping business during their summer vacation
Three college students consider the option of forming a lawn care and landscaping business during their summer vacation. They estimate the following costs:
Insurance $ 3,300 for the summer
Equipment Rental Fees $ 1,500 for the summer
Fuel and Supplies $ 5 per lawn
Miscellaneous Expenses $ 2 per lawn
Their projected revenue depends on the number of lawns serviced. The price per job is $50. The going wage for a typical unskilled college student is about $4,500 for the summer months. Realistically, the small business should expect to service about 300 lawn jobs during the summer. Should the three students launch the business? Why or why not?
Expert Solution
Accounting Profit Equation= Explicit Revenue- Explicit Cost
= 50x-($3300+1500+5x+2x)
=50x-4800-7x
= 43x-4800
Note: Accounting equation would only include the explicit cost and not the implicit cost.
Economic Profit Equation= Explicit Revenue- Explicit Costs- Implicit Costs
= 50x-($3300+1500+5x+2x)-(4500*3)
= 43x-4800-13500
= 43x-18300
Economic equation would include both the implicit and the explicit cost.
A business of 300 lawns would mean an accounting profit of
Accounting Profit Equation= 43x-4800
= 43(300)-4800
=12900-4800
=$8100
Economic Profit= 43x-18300
= 43(300)-18300
=$12900-18300
=(-)$5400
So , with the opportunity cost or economic profit, the three students should not launch the business.
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