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: Revenues 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) 60,000 Legal expenses 88,000 Corporate income tax payments 90,000 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. During the first year of operation, page 34the 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. What are the total explicit, total implicit, and total economic costs for the year? What is accounting profit? What is economic profit? Given your answer in part c, evaluate the owner’s decision to leave his job to start Sound Devices.
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: Revenues 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) 60,000 Legal expenses 88,000 Corporate income tax payments 90,000 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. During the first year of operation, page 34the 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. What are the total explicit, total implicit, and total economic costs for the year? What is accounting profit? What is economic profit? Given your answer in part c, evaluate the owner’s decision to leave his job to start Sound Devices.
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