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?

Answer 1

Answer:

The accounting here is $145,000.

The implicit cost is $75,000.

The opportunity cost is $220,000.

Explanation:

Jamie is currently earning $75,000.

But he is planning to leave his job to start his business.

The annual overhead and operating cost is $145,000. This is the explicit or direct cost.

The salary that Jamie is giving up is the indirect or implicit cost.

The accounting cost involves only direct or explicit cost. So the accounting here is $145,000.

The implicit cost is $75,000.

The opportunity cost includes both explicit as well as the implicit cost involved in the production process.

So, the opportunity cost here is

= $145,000 + $75,000

= $220,000