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Scott, MIT Graduate
Category: Homework
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Experience:  MIT Graduate (Math, Programming, Science, and Music)
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1.At the beginning of the year, an audio engineer quit his

Customer Question

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 2010 Sound Devices, Inc. is given below.

Revenues
Revenues from sales of products 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 operative costs and expenses ..........................................$555,000

Income from operations .................................................................$415,000
Interest expense from 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 15% return by investing in stocks of other new businesses with risk levels similar to the risk level of Sound Devices.

a. What are total explicit costs (including taxes) for Sound Devices in 2010?
b. What is total implicit in 2010?
c. Referring to the information in the first question, what is total economic cost in 2010? d. What is (after tax) accounting profit in 2010?
e. What is economic profit in 2010?

2. Based on your answers to the previous five questions, which statement best describes the owner's decision to leave his job and start Sound Devices?

The owner has a higher economic income if he leaves his job and starts Sound Devices; however, non monetary benefits associated with starting his own business may outweigh higher economic income. (a)
Because the owner's economic profit is negative, under no circumstances should he leave his other job and start Sound Devices. (b)
Because the owner's economic profit is positive, he is necessarily better off starting Sound Devices than working for another company. (c)
The owner has a lower economic income if he leaves his job and starts Sound Devices; however, non monetary benefits associated with starting his own business may outweigh lower economic income (d)


3.Complete the following sentences with one of the available options.


An activity should be increased if


An activity should be decreased if


The optimal level of activity occurs at the activity level for which


At the optimal level of activity, _______________ is maximized.

Answer
A. net benefit
B. net benefit exceeds total benefit
C. total cost
D. marginal cost exceeds marginal benefit
E. marginal benefit exceeds marginal cost
F. marginal benefit equals marginal cost
G. total cost exceeds total benefit
H. total benefit





4.Use the available options to complete the following sentences.


If Pa = $20, Pb = $15, MBa = 400, and MBb = 600, the decision maker should ___________


If Pa = $20, Pb = $30, MBa = 200, and MBb = 300, the decision maker should ___________


If Pa = $20, Pb = $40, MBa = 300, and MBb = 400, the decision maker should ___________
Answer
A. Keep the same amounts of A and B
B. Use more B and less A
C. Use more A and less B

5.Referring to the previous question, if the substitution of A for B continues to equilibrium, what will be the equilibrium relationship between MBa and MBb?
a. MBa MBb
c. MBa = MBb
d. There is not enough information to tell.
Submitted: 3 years ago.
Category: Homework

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