Jamie is considering leaving her current job, which pays $75,000 per year, to st

Question

Jamie is considering leaving her current job, which pays $75,000 per year, to start a new company that develops applications for smart phones.  Based on market research, she can sell about 50,000 units during the first year at a price of $4 per unit.  With annual overhead costs and operating expenses amounting to $145,000, Jamie expects a profit margin of 20 percent.  This margin is 5 percent larger than that of her largest competitor, Apps, Inc.

a. If Jamie decides to embark on her new venture, what will her accounting costs be during the first year of operation?  Her implicit costs?  Her opportunity costs?

Accounting costs:  $
Implicit costs:        $
Opportunity costs:  $

b. Suppose that Jamie

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

Accounting Costs = Annual Overhead Costs and Operating Expenses = 145000

Implicit Costs = Value of Salary Given Up = 75000

Opportunity Costs = Accounting Costs + Implicit Costs = 145000 + 75000 = 220000

Part B:

Revenue needed to earn positive accounting profits = Greater than 145000 (that is, more than accounting costs)

Revenue needed to earn positive economic profits = Greater than 220000 (that is, more than Opportunity Costs)

Thanks.

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