Larry worked as a lab tech and made $51,000 per year. However, he and his wife Lana had always dreamed of opening a bowling alley. After Larry is hit by a bus and gets a $1,000,000 settlement they decide that life is too short!! He quits his job and they open Larry and Lana’s Lanes. With the settlement money, he is able to secure a loan to purchase a lot and build the bowling ally of their dreams. He now pays $2500 a month on his business loan for the property. Had he invested the million dollars he would have made 7% interest yearly. Lana works at the lanes for free- but prior to the bus accident had been applying for minimum wage jobs with an average salary of $18,000 per year. Their insurance costs are 5,000 a year. They hire five full- time staff each making $1,500 a month. Their average cost for food and beverages come out to $8,000 a month. The lanes require a monthly maintenance contract of $200 a month.
The bowling ally brings in $370,000 of revenue the first year, and $300,000 the second year.
Identify Larry and Lana’s fixed and variable costs?
Solve for:
Explicit costs:
Implicit Costs
Accounting Profit for Year 1 and Year 2
Economic Profit Year 1 and Year 2
What level of Total Revenue would represent a normal profit? ___________________
Given these facts, does it make sense for Larry and Lana to continue with the Lanes? Explain.
What advice would you offer to Larry and Lana?
