Chapter 1 Applied Problem 1

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:

2010
Revenue
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 expenses (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 the 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?

Total explicit cost is $893,000 which is total sales – net income equal explicit cost expenses.

Total implicit cost in 2010 is the salary he is giving up $175,000.00

Total Economic Cost for 2010 is $\893,000 plus $175,000 = $1,068,000.00

Explicit costs are monetary opportunity costs of using market-supplied resources, which are resources owned by others and hired, rented or leased by the firm (Thomas & Maurice, 2011). Implicit costs are nonmonetary opportunity costs associated with using owner-supplied resources (Thomas & Maurice, 2011). Total economic costs are the sum of the opportunity costs of