Willa and Westley are siblings who built a hair salon business from the ground up. They are now contemplating opening an additional salon location. The estimate to open an additional salon would mean adding $1 milion in expenses with their profit increasing by $400,000 each year for the next 5 years (all other things equal), Willa and Westley decide

A. to open a second salon because the marginal cost of the new salon is low compared to other simlar projects

B. to not open a new salon because the marginal costs prove to be too high

C. to take on the new salon because the expected marginal benetit ($2 mlton over 5 years)

Question

Business

Rory Russo

18 September, 12:23

Willa and Westley are siblings who built a hair salon business from the ground up. They are now contemplating opening an additional salon location. The estimate to open an additional salon would mean adding $1 milion in expenses with their profit increasing by $400,000 each year for the next 5 years (all other things equal), Willa and Westley decide

A. to open a second salon because the marginal cost of the new salon is low compared to other simlar projects

B. to not open a new salon because the marginal costs prove to be too high

C. to take on the new salon because the expected marginal benetit ($2 mlton over 5 years)

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Answers (1)

Know the Answer?

Azaria Sweeney · Answer 1

The correct option is C

Explanation:

The annual profit increase = $400,000

The following formula is to be used in order to calculate the total profit enhancement in five years

The total profit increase in 5 years = 400000 multiply with 5 = $2,000,000 = $2 million, As compared to cost of $1 million.

Thus, The correct option is answer (C) To take on the new salon because the expected marginal benefit ($2 million over 5-years) is greater than the estimated marginal cost ($1 million).