04 Jun Date: Instructor Name: Week One Exercises Chapter 1
Question
Date:
Instructor Name:
Week One Exercises
Chapter 1
Applied Problem 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:
Revenues 2010
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 $415,000
Interest expense (bank loan) $ 45,000
Legal expenses to start business $ 28,000
Income taxes $165,000
Net income $177,000
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. In 2010, 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 in 2010?
b. What is accounting profit in 2010?
c. What is economic profit in 2010?
d. Given your answer in part c, evaluate the owner’s decision to leave his job to start Sound Devices.
Chapter 2
Applied Problem 2.
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.
b. The scientists in the agricultural extension service of the University of Florida discover a way to double the number of oranges produced by each orange tree.
c. The American Medical Association announces that drinking orange juice can reduce the risk of heart attack.
d. The price of Florida grape fruit falls.
Applied Problem 4.
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