Question

Collins Food Group (CFG) owns both Sizzler and KFC in Australia. Due to Sizzler’s continuing poor performance, CFG is deciding whether or not to close the Sizzler restaurants and re-invest into KFC to continue its growth. CFG’s quarterly revenues are $409,990 while Sizzler remains open, and they estimate revenues will increase to $493,082 every three months if the divestment of Sizzler goes ahead. Running costs will remain constant at $87,186 every three months in either case. The cost of the divestment of sizzler would be $96,561 spread evenly over one year.

What is CFG’s economic profit (every three months) after divestment? Answer number to the nearest whole number and include a negative sign if it is an economic loss (with no decimal places, $ sign, spaces or commas).

Answer 1

CFG's quarterly revenue when Sizzler remains open = $409,990

Running costs every 3 months = $87,186

CFG's profit when Sizzler remains open = Quarterly revenue - Quarterly running costs = $409,990 - $87,186 = $322,804

CFG's quarterly revenue after divestment = $493,082

Running costs every 3 months after divestment = $87,186

Cost of divestment, spread evenly over the year = $96,561

Therefore, quarterly cost of divestment= $96,561 x 3/12 = $24,140.25

Implicit cost of CFG after disinvestment = Profit of CFG before disinvestment = $322,804

Explicit cost of CFG after disinvestment = Cost of divestment + Running Cost = $24,140.25 + $87,186 = $111,326.25

CFG's economic profit(quarterly) after disinvestment = Quarterly revenue - (Implicit cost + Explicit cost) = $493,082 - ($322,804 + $111,326.25) = $493,082 - $434,130.25 = $58,951.75

Ans: 58952