Question

Jamie is considering leaving her current job, which pays $75,000 per year, to start a new...

Jamie is considering leaving her current job, which pays $75,000 per year, to start a new company that develops applications for smartphones. Based on market research, she can sell about 50,000 units during the first year at a price of $4 per unit. With annual overhead costs and operating expenses amounting to $145,000, Jamie expects a profit margin of 20 percent. This margin is 5 percent larger than that of her largest competitor, Apps, Inc.

a. If Jamie decides to embark on her new venture, what will her accounting costs be during the first year of operation? Her implicit costs? Her opportunity costs?

Accounting costs: $ _________________
Implicit costs:        $ ________________
Opportunity costs: $ _____________________

b. Suppose that Jamie’s estimated selling price is lower than originally projected during the first year. How much revenue would she need in order to earn positive accounting profits? Positive economic profits?

Revenue needed to earn positive accounting profits: $ __________________
Revenue needed to earn positive economic profits:   $ ___________________

Homework Answers

Answer #1

a) The value of salary foregone is $75,000. This represents the implicit cost which is not incurred explicitly but is realized in terms of lost opportunity. Explicit costs are $145,000. Hence, accounting cost is $145,000, implicit cost is $75,000 and total opportunity cost (sum of explicit and implicit cost) is $220,000.

b) Note that revenue should be $200,000 based on the sales of 50,000 units at a price of $4 per unit. But if this is not the case, then the revenue required to be earned to have at least some accounting profit should be greater than or equal to $145,000. Similarly, the revenue required to be earned to have at least some economic profit should be greater than or equal to $220,000

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Leslie quit her job where she earned $75,000 per year, to start her own accounting firm....
Leslie quit her job where she earned $75,000 per year, to start her own accounting firm. She invested $60,000 of her own funds in furniture, computers, and other assets. During the first year of operation, the firm’s costs were $22,000 for rent on the office building, $180,000 for wages and salaries of employees, and $12,000 for supplies and utilities. The market value of the firm’s assets at the end of the year was $48,000. During the year, the firm billed...
Cathy Smith manages a photocopying establishment and earns $30,000 per year. She decides to leave her...
Cathy Smith manages a photocopying establishment and earns $30,000 per year. She decides to leave her current job and open and operate her own store. She invests $20,000 into the company to start her business, which she takes out of her savings account that was earning 5% interest per year. During her first year of operation she expects the following: Revenue from sales $110,000 Salaries to hired help $45,000 Supplies$15,000 Rent$12,000 Utilities$13,000 ----------------------------------------------------------- 1. Calculate expected explicit costs for year...
An owner can lease her building for $120,000 per year for three years. The explicit cost...
An owner can lease her building for $120,000 per year for three years. The explicit cost of maintaining the building is $40,000,and the implicit cost is $55,000. All revenue are received,and cost borne, at the end of each year. If the interest rate is 5 percent, determine the present value of the stream of: Accounting profits and Economic profits
Jodi is a successful lawyer. She earns $50,000 per year from her law job plus $5,000...
Jodi is a successful lawyer. She earns $50,000 per year from her law job plus $5,000 per year in rental income from a building she owns that is rented to a clothing store. Jodi also has $10,000 in a savings account that earns 10% interest, or $1,000 per year. One day, Jodi decides to leave her profession and open a bookstore in the building she owns. She withdraws the money from her savings account and uses it to purchase special...
1. A currently employed woman, working for $40,000 per year is considering opening her own business....
1. A currently employed woman, working for $40,000 per year is considering opening her own business. She estimates that renting a space will cost her $30,000 per year; hiring a part-time employee will cost her $20,000 per year; purchasing equipment will cost $70,000; and other out-of-pocket expenses will come to $30,000. She estimates that her total revenues will be $170,000 per year. a. How much would be the explicit costs of her business be? b. How much would the accounting...
Opportunity cost Sarah quit her job as a nurse where she was earning $50,000 per year...
Opportunity cost Sarah quit her job as a nurse where she was earning $50,000 per year to start a business (salon). To begin the business, Sarah withdraws $80,000 from the bank from which she was earning 5% interest rate. Also, to begin the business Sarah resigns her sports career where she was earning $30,000 per year. You are given the following information regarding the performance of the salon for the 1st year Total revenue $ 200,000 Cost of labour $...
You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You...
You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur. You will not switch unless you earn an accounting profit that is on average at least as great as your current salary. You look into opening a small grocery store. Suppose that the store has annual costs of $150,000 for labor, $60,000 for rent, and $30,000 for equipment. There is a one-half probability that revenues will be $200,000 and a one-half probability that revenues will...
Lisa Conway worked as a real estate agent for Avis Reality for 12 years. Her annual...
Lisa Conway worked as a real estate agent for Avis Reality for 12 years. Her annual income is approximately $120,000 per year. Lisa is considering establishing her own real estate agency. She expects to generate revenues during the first year of $3 million. Salaries paid to her employees are expected to total $2 million. Operating expenses (i.e., rent, supplies, utility services) are expected to total $300,000. To begin the business, Lisa must borrow $550,000 from his bank at an interest...
Jack runs an automotive shop. He pays 3 worker $30,000 each per year. He leases his...
Jack runs an automotive shop. He pays 3 worker $30,000 each per year. He leases his shop for $15,000 per year. He has material costs of $25,000 per year. He pays $3,000 per year for utilities and insurance. He borrows $150,000 at an interest rate of 10 percent and invests $20,000, which could have earned him $2000 per year if alternatively invested, of his own money to invest in the business. He was offered $75,000 per year to work for...
A) Micro Co., which began business at the start of the current year, had the following...
A) Micro Co., which began business at the start of the current year, had the following data:       Planned and actual production: 40,000 units       Sales: 37,000 units at $15 per unit       Production costs: Variable: $4 per unit, Fixed: $260,000       Selling and administrative costs: Variable: $1 per unit, Fixed: $32,000 Contribution margin that Micro would disclose on an absorption-costing income statement is: a. $147,000 b. $78,000 c. $166,500 d. $0 e. 370,000 B) The variable costing to the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT