Getting to school for your 8 A.M. class doesn\'t leave much time for breakfast,

Question

Getting to school for your 8 A.M. class doesn't leave much time for breakfast, and you are quite hungry by the time class ends. It is a long walk to the cafeteria, the lines are long once you get there, and you find yourself having to decide between having breakfast and getting to your next class on time. Many of your friends have expressed the same problem. The administration has agreed to let you set up a table just outside the building where you will sell various snacks for $1 each. You have agreed to pay the administration $500 per month, and salaries to your friends to run the business will be another $500 per month. It will cost you 50 cents each to buy the pre-packaged snacks. You believe you can sell 2,000 snack packs per month.

Explanation / Answer

1. Total Fixed costs = $500+500 = $1000.

2. Total Variable Costs = $0.5*2000 = $1000.

3. Fixed Cost per Snack Pack = $1000/2000 = 50 cents

4. Variable Cost per Snack Pack = $1000/2000 = 50 cents

5. Average cost per snack pack = 50+50 cents = $1

6. Average profit margin per snack pack = $1 - Selling price = $(1-1) = 0.

7. As the current case gives break-even, there is no harm in starting the business. Moreover it will save a lot of time for those who go to cafetaria for breakfast. It should be opened morally.

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