Problem:
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:
2010
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Revenues
Revenues 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
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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
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$177,000
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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.
Question 1: What are the total explicit, total implicit, and total economic costs in 2010?
Question 2: What is accounting profit in 2010?
Question 3: What is economic profit in 2010?
Question 4: Given your answer in part c, evaluate the owner's decision to leave his job to start Sound Devices.