ECON519 Mauricio Cordero WS 1
Applied Problems for WS#1
Mauricio Cordero
Universidad Metropolitana
ECON 519
Workshop 01
Professor: Jose Ortega
January 23, 2015
1. Applied Problems
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, is show below:
Revenues 2007
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. In 2007, 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 in 2007?
Explicit cost = Total Operating Cost and Expenses = $555,000.
Implicit cost = $100,000. * 15% = $15,000.
Total Economic Cost = Explicit Cost + Implicit Cost
= $555,000 + $15,000 = $570,000.
b. What is accounting profit in 2007?
Accounting Profit = Total Revenue – Explicit Cost
= $970,000 – $555,000 = $415,000
c. What is economic profit in 2007?
Economic Profit = Total Revenue – Total Economic Cost
= Total Revenue – Explicit Cost – Implicit Cost
= $970,000 - $555,000 - $15,000 = $400,000
d. Given your answer in part c, evaluate the owner 's decision to leave his job to start Sound Devices. As per current
Mauricio Cordero
Universidad Metropolitana
ECON 519
Workshop 01
Professor: Jose Ortega
January 23, 2015
1. Applied Problems
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, is show below:
Revenues 2007
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. In 2007, 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 in 2007?
Explicit cost = Total Operating Cost and Expenses = $555,000.
Implicit cost = $100,000. * 15% = $15,000.
Total Economic Cost = Explicit Cost + Implicit Cost
= $555,000 + $15,000 = $570,000.
b. What is accounting profit in 2007?
Accounting Profit = Total Revenue – Explicit Cost
= $970,000 – $555,000 = $415,000
c. What is economic profit in 2007?
Economic Profit = Total Revenue – Total Economic Cost
= Total Revenue – Explicit Cost – Implicit Cost
= $970,000 - $555,000 - $15,000 = $400,000
d. Given your answer in part c, evaluate the owner 's decision to leave his job to start Sound Devices. As per current
References: Christopher R. Thomas, S. Charles Maurice (2008). Managerial Economics (9th edition pp. 26-27).