Submitted by: Submitted by heaven4u09
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Category: Business and Industry
Date Submitted: 10/03/2011 01:42 AM
Chapter 1- Question 1
At the beginning of the year, an audio engineer quit his job and gave up a salary of $175,000 per year in order to start his own business, Sound Devices, Inc. The new company builds, installs, and maintains custom audio equipment for businesses that require high-quality audio systems. A partial income statement for Sound Devices, Inc.,
Revenue from sales of products and services - 970,000
Operating Cost and expenses
Cost of products and services sold - 355,000
Selling expenses - 155,000
Administrative expenses - 45,000
Total Operating cost and expenses 555,000
Income from operations - 415,000
Interest expenses (bank loans) - 45,000
Legal expenses to start business - 28,000
Income Taxes - 165,000
Net Income - 177,000
To get started, the owner of sound devices spent 100,000 of his personal savings to pay for some of the capital equipment used in the business. In 2007, the owner of Sound Devices could have earned a 15% return by investing in stocks of other new businesses with risk levels similar to the risk level of Sound Devices.
a. What are the total explicit, total implicit, and total economic costs in 2010?
Total implicit: $830,000
Total explicit cost: $555,000
Total economic cost: $1385,000
b. What is accounting profit in 2010?
Total Revenue – Explicit Cost = Accounting profit
$970,000 – $555,000 = $415,000 accounting profit.
c. What is economic profit in 2010?
Total Revenue – (Explicit cost + Implicit cost) = Economic Profit
$970,000 – ($555,000 + $830,000)
$970,000 – $1388,000 = $415,000 economic profit.
d. Given your answer in part c, evaluate the owner’s decision to leave his job to start Sound Devices. The audio engineer made the right decision to leave his job to start a Sound Device. A positive economic profit means that he made the right decision. A negative economic profit would mean that he made the wrong decision....