3 This is a simplified question that you must answer the ans

3. (This is a simplified question that you must answer; the answer \"insufficient information\" is unacceptable.) Tara is considering leaving her curent job, which pays $56,000 per year, to start a new company that manufactures a line of special pens for personal digital assistants. Based on market research, she projects that she can sell 160,000 units during the first year at a price of $20 per unit. She expects annual overhead costs and operating expenses anounting to S3,160,000. If Tara decides to embark on her new venture, what will her accounting costs be during the first year of operation? Her opportunity costs? (Assume that her cost projections are accurate) a. b. Based upon her projections, should Tara leave her job and start the business? Explain why or why not, using a calculation of economic profits in your answer c. Consider the estimated selling price of the pens $20, suppose that she is unsure that this projected selling price is accurate and she wishes to calculate altermate selling prices. (Assume that here sales projection of 160,000 mits is accurate, and her cost projection of $3,160,000 is also accurate.) What price per pen would she need to charge in order to eam $1 of positive accounting profits? S1 of positive economic profits? (Round your answers to the nearest penny, if necessary) up ALL TOUCH ALL-IN-ONE. ALL YOUR FAMILY NEEDS

Solution

a) The accounting costs include everything which is explicit and can be calculated in monetary terms .

Accounting cost

Total revenue earned is $20* 160000 = $ 3,200,000

Total accounting cost is $3,160,000

Therefore profit = revenue - cost = $ 3,200,000-3,160,000= $40,000

Economic profit is both impicit and explicit cost included

the opportunity cost of this business would be leaving her current job which is $56,000

Total economic cost = accounting cost + opportunity cost

= $3,160,000+56,000

= $ 3,216,000

b) No Tara should not leave her job beacuse the economic cost is more than the revenue she earns in this business . In other words she would be giving up her job which is paying her $ 56,000 for $40,000 worth of profits which is not a rational deal .

c) Accounting profit of $1

For earning accounting profit of $1 per pen would mean a total profit of $1*160,000 units = $160,000

Also we know the formula of profit as

Profit = revenue - cost

so revenue = profit + cost = $ 160,000+ $ 3,160,000 = $ 3,320,000

Revenue / number of pens = selling price per pen

$3,320,000/ 160,000= $20.75

Economic profit of $ 1 would mean that first the loss due to the opening of business should be covered which is the opportunity cost ie Tara should atleast earn the amount she was earning in her job . The profit was $ 40000 ie $ 16000 less of her job\'s salary. So we will add this to the accounting profit so that her opportunity cost is being covered.

economic profit = revenue-( explicit +implicit costs)

$ 160,000= revenue -(3,160,000+ 56,000)

revenue= $160,000+3,160,000+ 56,000= $ 3376000

cost per pen with economic profit as $ 1 = total revenue / number of pens = $3,376,000/ 160,000 = $ 21.1