Calculation of economic profit also accounting profit.
Bob also Jane decides to open their own business selling ergonomically correct office furniture which Jane has designed. Suppose they operate this business from leased office space near their home. Also suppose which they lease their computer equipment also data base software. The actual production of the furniture is subcontracted to various commercial factories as customer orders arrive also the unassembled kits are shipped via UPS to clients throughout the U.S. Their target marketplace is small businesses including those run out of home offices.
They have so much faith in the potential of Jane's designs which they quit corporate jobs in marketplace also MIS administration (which jointly had earned them $250,000 per yr) also sink $500,000 (.5 million) of their own funds into this venture at the start of their first yr to place advertising in trade journals also on the internet. (Suppose this $500,000 had previously been invested in a diversified portfolio which had been averaging a 10% annual rate of return before tax.) At the end of the yr they Computed which they had the following costs also revenues.
Total Revenues: $5.0 million
Costs:
Payments to furniture subcontractors $3.5 million
Shipping Costs .1 million
Lease Payments on Office Space also Computer
Equipment &Software $ .1 million
Overhead Expenses: Insurance, utilities etc. $ .1 million
Advertising on Internet & Magazines
(Purchased at start of yr) $ .5 million
Additional Sales Expenses (phones, business travel, $ .2 million
Entertaining clients etc.)
Total Listed Costs = $4.5 million
a) Is Bob & Jane's economic profit different from their accounting profit? If so, explain how much economic profit did they earn during this first yr of operation?
b) Illustrate what are Bob & Jane's fixed costs during their first yr of operation?