Learning Act 2-8

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Learning activity II ch 8-U4
Exercise 1: Anthony Figueroa is a CPA, who works for an accounting consulting firm. His annual salary income is $70,000. Anthony is considering opening up his own consulting firm. He estimates that the annual rent for an office would cost him $20,000; a secretary would cost $24,000 per year. If he would rent office equipment, he would have to pay $11,000 per year. The purchase of required supplies, payment of electricity bills, water and telephone bills, would cost approximately $5,000 a year. Anthony estimates that the revenues that he would generate with consulting services would be $120,000 a year. a.Explicit cost = Accounting cost

Rent $20,000
Sal. Secretary 24,000
Off. Equipment 11,000
Utilities 5,000
Total. Ex. Cost$60,000
b.The forgone salary is $70,000.
c.Economic profit = TR – (Explicit cost + Implicit cost)
Economic profit = 120,000 – (60,000+70,000)
Economic profit = -10,000
d.Because of the negative result, Anthony should work for someone else, he should not run his own business. Exercise 2: Suppose that the economist of Corporation XYZ estimates the following long run cost function for a product M that the company produces and sells. TC = 5Q2 + 10Q +180

The market price for product M is fixed at P = $70
a.TFC = 180
b.TVC = 5Q² + 10Q
c.ATC = MC
ATC = (5Q² = 10Q = 180)
ATC = 5Q +10 +180/Q
MC = 10Q + 10
5Q + 10 +180/Q = 10Q + 10
-5Q + 180Q = 0
-5Q² + 180 = 0
-5Q² = -180
√Q² =√36
Q = 6 units
d.P = MC
70 = 10Q +10
60 = 10Q
Q = 6
Profits = TR –TC
Profits = 70(6) – (5x6² + 10x6 +180) = 0
Normal profits, because the profits equals 0.
P 8-3 Incremental Cost. South Park Software, Inc. produces innovative interior decorating software that it sells to design studios, home furnishing stores, and so on. The yearly volume of output is 15,000 units. Selling price and costs per unit are as follows:

Selling Price
Direct material
Direct labor
Variable overhead
Variable selling expenses
Fixed selling expenses
Unit profit before tax
$ 75
Management is evaluating the possibility of using the Internet to sell its software directly to consumers at a price of $300 per unit. Although no added capital investment is required, additional shipping and handling costs are estimated as follows:

Direct labor
$30 per unit
Variable overhead
$5 per unit
Variable selling expenses
$2 per unit
Fixed selling expenses
$20,000 per year

Calculate the incremental profit that South Park would earn by customizing its instruments and marketing them directly to end users.

Incremental revenue per unit ($300 - $250) $50
Incremental variable cost per unit ($30 + $5 + $2) -$37 Incremental profit contribution per unit $13
Yearly output volume in unitsH 15,000
Incremental variable profit per year$195,000
Incremental fixed cost per year -$20,000
Yearly incremental profit$175,000

Because the profit is positive, the decision to engage in further processing would be more profitable.

P 8.4 Accounting and Economic Costs. Three graduate business students are considering operating a fruit smoothie stand in the Harbor Springs, Michigan, resort area during their summer break. This is an alternative to summer employment with a local firm, where they would each earn $6,000 over the three-month summer period. A fully equipped facility can be leased at a cost of $8,000 for the summer. Additional 0projected costs are $1,000 for insurance and $3.20 per unit for materials and supplies. Their fruit smoothies would be priced at $5 per unit. A.What is the accounting cost function for this business?

The accounting cost function is:
TotalFixed Variable
Accounting = TCA = leasing plus + materials plus
Cost insurance costs supplies costs
= $8,000 + $1,000 + $3.2Q
= $9,000 + $3.2Q
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