Questions:
1 . Assuming that all other factors remain unchanged, determine how a firm's breakeven point is affected by each of the following:
a. The firm finds it necessary to reduce the price per unit because of increased foreign competition.
b. The firm's direct labor costs increase as the result of a new labor contract.
c. The Occupational Safety and Health Administration (OSHA) requires the firm to install new ventilating equipment in its plant. (Assume that this action has no effect on worker productivity.)
2. Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a current market value of $4 million. Bowen owes his local bank $3 million. Last year, Bowen sold $5 million worth of cotton. His variable operating costs were $4.5 million; accounting depreciation was $40,000, although the actual decline in value of Bowen's machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $30,000. Bowen can invest any funds that would be derived, if the farm sold, to earn 10 percent annually. (Ignore taxes.)
a. Compute and interpret Bowen's accounting profits.
b. Compute and interpret Bowen's economic profits.