Howard Bowen Case Summary

Solutions Chap 8 Suggested Exercises

2. Howard Bowen’s cotton farm analysis appears below. a. Accounting profits: Revenues $5,000,000 Less: Variable operating costs 4,500,000 Less: Depreciation 40,000 Less: Wages 50,000 Equals: Operating Income $410,000 Less: Interest expense 400,000 Accounting income before tax +$10,000 b. Economic profits: Revenues $5,000,000 Less: Variable operating costs 4,500,000 Less: Opportunity value of Bowen's income potential 30,000 Less: Economic depreciation 60,000 Equals: Economic profit before financial costs $410,000 Less: Interest expense 400,000 Less: Opportunity cost of net $1 million equity
Mary Graham’s work at Piedmont Properties. a. Pro forma Accounting pre-tax profits for the first year: Revenues $2,000,000 Less: Salaries 1,500,000 Operating expenses 250,000 Depreciation 5,000 Total 1,775,000 Operating income 245,000 Less: Interest expense 75,000 Accounting profit before tax $170,000 b. Pro forma Economic pre-tax profits for the first year: Revenues
Explicit costssalaries, operating expenses, depreciation for tax purposes ($5,000), and interest expenses. Implicit costsGraham's foregone income and additional depreciation ($15,000 = $20,000 $5,000). Note that Mary Graham would decide to start the new real estate agency using accounting data, because it produces more than her current $100,000 income. But, she would more likely decide to continue to work for Piedmont Properties using the economic data. 6. The Blair Company has multiple plant locations. a. One centralized plant in