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    Econ

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    Angeline ncht
    1. The total explicit costs for Sound Devices' first year of operation were $793,000. The total implicit costs were $190,000. The total economic costs were $983,000. 2. The accounting profit was $177,000. 3. The economic profit was -$13,000, indicating an economic loss for the first year. 4. Given the economic loss in the first year, it is difficult to fully evaluate the owner's decision to leave his job based on only one year of operations, as the business may become profitable in subsequent years with adjustments to production levels and other factors.

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    Econ

    Uploaded by

    Angeline ncht
    18 views3 pages
    1. The total explicit costs for Sound Devices' first year of operation were $793,000. The total implicit costs were $190,000. The total economic costs were $983,000. 2. The accounting profit was $177,000. 3. The economic profit was -$13,000, indicating an economic loss for the first year. 4. Given the economic loss in the first year, it is difficult to fully evaluate the owner's decision to leave his job based on only one year of operations, as the business may become profitable in subsequent years with adjustments to production levels and other factors.

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    1. The total explicit costs for Sound Devices' first year of operation were $793,000. The total implicit costs were $190,000. The total economic costs were $983,000. 2. The accounting profit was $177,000. 3. The economic profit was -$13,000, indicating an economic loss for the first year. 4. Given the economic loss in the first year, it is difficult to fully evaluate the owner's decision to leave his job based on only one year of operations, as the business may become profitable in subsequent years with adjustments to production levels and other factors.

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    18 views3 pages

    Econ

    Uploaded by

    Angeline ncht
    1. The total explicit costs for Sound Devices' first year of operation were $793,000. The total implicit costs were $190,000. The total economic costs were $983,000. 2. The accounting profit was $177,000. 3. The economic profit was -$13,000, indicating an economic loss for the first year. 4. Given the economic loss in the first year, it is difficult to fully evaluate the owner's decision to leave his job based on only one year of operations, as the business may become profitable in subsequent years with adjustments to production levels and other factors.

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    1.1.

    B Assignment
    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:

    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?
    Step 1: Calculating the total explicit costs.
    Explicit costs are the cleary stated costs that a business inccurs.
    (Wages, inputs, utility bills, and rents.)
    Explicit cost = Operating cost and expenses + interest on loan + legal
    expense + income tax
    Explicit cost = $555,000 + $45,000 + $28,000 + $165,000
    Explicit cost = $793,000

    The total explicit costs is $793,000.


    Step 2: Calculating the total implicit costs.
    Implicit costs are costs that are not directly link to an expenditure.
    Implicit cost = Salary + interest
    Interest = Personal savings x return rate
    Interest = $100,000 x 15%
    Interest = $15,000
    Implicit cost = $175,000 + $15,000
    Implicit cost = $190,000

    The total implicit costs is $190,000.

    Step 3: Calculating the total economic costs.


    Economic cost is the total of explicit and implicit costs.
    Economic Cost= Explicit Costs + Implicit Costs
    Economic Cost= $793,000 + $190,000
    Economic Cost = $983,000

    The total economis costs is $983,000.


    b. What is accounting profit?
    Accounting profit is the difference between the monetary costs that a
    company incurs and the profits that it earns.
    Accounting profit = total monetary revenue- Explicit cost.
    Accounting profit = $970,000 - $793,000
    Accounting profit = $177,000

    Accounting profit $177,000.

    c. What is economic profit?


    Economic profit is the monetary costs and opportunity costs a
    firm pays and the revenue a firm receives.
    Economic Profit = total revenue – (explicit costs + implicit costs)
    Economic Profit = $970,000 – ($793,000 + $190,000)
    Economic Profit = $970,000 – $983,000
    Economic Profit = -$13,000

    Economic loss -$13,000. Meaning the Sound Devices Inc. Had an


    economic loss in the first year.

    d. Given your answer in part c, evaluate the owner’s decision to leave his job to
    start Sound Devices.
    Although there’san ecnomic loss there is accounting profit, the Sound Devices
    Inc. Suffered in economic loss in the first year of operation. This is only the first
    year of the operation, it will be difficult to judge the owner’s decision base on only
    one year operation. There are chances that in the next operation year there will
    be both accounting and economic profit. The owner must consider to choices
    about the production levels and other factors on the business.

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