Problem
Jim is a florist who runs Bountiful Flower Shop as a sole owner. His typical monthly operating results include the following: sales revenue $4,000, flower costs $800, supplies $300, labor costs $600, utilities $250, rent $720, and other costs $350.
He recently attended a trade show and was attracted by a national chain that offered him referral service, baskets, and new flower arrangements in exchange for a monthly licensing fee of $1,000. He figures that the additional business from referrals will increase his revenues by 40 percent, flower materials, supplies, and labor costs by 45 percent, utilities by 10 percent, and other costs by 20 percent. Rent will not change as he would still use the same facility.
1. Should Jim expand his business to be associated with the national chain? Support your answer.
2. If Jim can negotiate a different term with the national chain, what licensing fee makes him indifferent between the two choices (i.e., the status quo of going solo vs. the alternative of being associated with the national chain)?