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 over-head 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? 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 account-ing profits? Positive economic profits?
- 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 over-head 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
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 account-ing profits? Positive economic profits?
2. Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost productivity. Despite the enormous potential market, many biotech companies have shied away from funding research and development (R&D) initiatives to find a cure for drug and alcohol addiction. Your firm—Drug Abuse Sciences (DAS)—is a notable exception. It has spent $200 million to date working on a cure but is now at a crossroads. It can either abandon its program or invest an-other $60 million today. Unfortunately, the firm’s opportunity cost of funds is 5 per-cent, and it will take another five years before final approval from the Food and Drug Administration is achieved and the product is actually sold. Expected (year-end) profits from selling the drug are presented in the accompanying table. Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Explain.
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