Question

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 the first year of operation for Sound Devices, Inc., is shown below:
Revenues
Revenue from sales of product and services .................. $970,000
Operating costs and expenses
Cost of products and services sold ............................... 355,000
Selling expenses ........................................................... 155,000
Administrative expenses .............................................. 45,000
Total operating costs and expenses .............................. $555,000
Income from operations ............................................... $415,000
Interest expense (bank loan) ........................................ 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. During the first year of operation, the owner of Sound Devices could have earned a 15 percent return by investing in stocks of other new businesses with risk levels similar to the risk level at Sound Devices.
a. What are the total explicit, total implicit, and total economic costs for the year?
b. What is accounting profit?
c. What is economic profit?
d. Given your answer in part c, evaluate the owner’s decision to leave his job to start Sound Devices.



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  • CreatedNovember 18, 2014
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