At the beginning of the year, an audio engineer quit his job and gave up a salary of 175.00 per year to start his own business Sound Devices Inc. The company builds, installs and maintains custom audio equipment for a business that require high-quality audio-systems. A partial income statement for the first year of operation for Sound Devices Inc. is shown below: Revenue Revenue from sales of product and services $970,000 Operating cost and expenses Cost of products and services sold $355,000 Selling Expenses $155,000 Administrative Expenses $45,000 Total Operating cost 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. During the first year of operation, the owner of Sound Devices Inc. could have earned a 15% return by investing in stocks of other new businesses with risk levels similar to the risk level at Sound Devices Inc. A. What are the total explicit, total implicit and total economic costs for the year? B. What is the accounting profit of Sound Devices Inc.? C. What is economic profit?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter2: Basic Cost Management Concepts

Section: Chapter Questions

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At the beginning of the year, an audio engineer quit his job and gave up a salary of 175.00 per year to start his own business Sound Devices Inc. The company builds, installs and maintains custom audio equipment for a business that require high-quality audio-systems. A partial income statement for the first year of operation for Sound Devices Inc. is shown below:

Revenue
Revenue from sales of product and services	$970,000
Operating cost and expenses
Cost of products and services sold	$355,000
Selling Expenses	$155,000
Administrative Expenses	$45,000
Total Operating cost 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. During the first year of operation, the owner of Sound Devices Inc. could have earned a 15% return by investing in stocks of other new businesses with risk levels similar to the risk level at Sound Devices Inc.

A. What are the total explicit, total implicit and total economic costs for the year?

B. What is the accounting profit of Sound Devices Inc.?

C. What is economic profit?

D. Given your answer in C, evaluate your decision to leave your job to start your company.

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