Chapter 1 Applied Problem 1
1. 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 shown below:
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 ...view middle of the document...
B. What is accounting profit in 2010?
Accounting Profit = Total Revenue – Explicit Costs
$970,000 - $893,000 = $77,000
C. What is economic profit in 2010?
Economic Profit = Total Revenue – Explicit Cost – Implicit cost
$970,000 - $893,000 - $175,000 = -$98,000
D. Given your answer in part c, evaluate the owner’s decision to leave his job to start Sound Devices.?
Using the economic profit of 2010 the owner starting his own company Sound Devices was not a profitable one. He is in the negative of $98,000. He is better off working at the established firm with his annual income of $175,000.
Chapter 2: Applied Problems 2 and 4
Florida Citrus Mutual, an agricultural cooperative association for citrus growers in Florida, needs to predict what will happen to the price and output of Florida oranges under the conditions below. What are your predictions? For each part, sketch a graph showing the appropriate demand and supply analysis,
A. A major freeze destroys a large number of the orange trees in Florida.
The supply curve of oranges in Florida will decrease which will caused the price for orange juice products to increase. The demand curve will go up since there are less supply of oranges until it reach equilibrium price that the customers are willing to pay.
B. The scientists in the agricultural extension services of the University of Florida discover a way to double the number of oranges produced by each orange tree.
The supply curve will increase due to the agricultural knowledge of producing double the number of oranges. Based on the information that there are plenty of oranges out there, demand will decrease if the price is too high which will drive the price to drop.