Answer to Question #110768 in Finance for Ralph Broer

Question #110768
A student is considering opening a business selling ice cream next summer. The student views this as an alternative to taking summer employment with a local firm where he would earn £4,000 during the 3-month summer period. It would cost £2,000 to obtain a license to operate their stand, £1,200 per month to rent the stand with the necessary equipment and £150 per month for insurance. Petrol costs are estimated at £12 per day and are not affected by sales. The ice cream ingredients can be bought for £5.60 per kilo and cones cost £1.80 per dozen. The ice cream cones contain 100 grams of ice cream and would sell for £1.50 each.

d) Chocolate flakes can be bought at £5 for a box of 20, and the ice creams with flakes are sold for £2.20. If 40% of the customers buy these, calculate the effect of this on the output necessary to make normal profit.
e) If the student can sell 200 ice creams a day, 40% with flakes, estimate the economic profit he would make. Advise him whether he should enter the business.
Expert's answer

1.Calculate fixed costs (TFC):

2.Calculate the variables costs per unit of output (AVC):

flake-free ice cream 100g:


flake ice cream:


e)calculate the breakeven point in pieces

d) profit:

flake ice cream

18400-7360=11040 flake-free ice cream


profit is more than income from employment,

so can do business

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