Question

An entrepreneur is considering starting a new business to produce and sell gourmet cookie dough. The entrepreneur estimates that average total costs per pack of dough would be $7, of which variable costs per pack would be $5. An incumbent bakery in the neighborhood sells cookie dough for $10 per pack. The entrepreneur estimates that this bakery spends $8 in total costs on each pack of dough, $7 of which is variable costs. Should the entrepreneur start the new business?

Answer 1

Answer:

The entrepreneur should start the new business.

Explanation:

The reason is that the total cost of the competitor is at $8 which includes $7 variable cost per unit and $1 fixed cost. Whereas on the other hand, the total cost $6 of the new business is composed $5 and $1 assumed fixed cost because the only cost we are provided is variable cost. This shows that the company has a competitve advantage of $1 in controlling the cost of the product. So the company must start the new business as the new business has better chances to attract customers and form relations with new customers depending upon the price differences which the competitor is unable to do so.