Starting a New Company: Analyzing Costs and Profits

What are the accounting costs, implicit costs, and opportunity costs for Jamie's new venture?

a. What will her accounting costs be during the first year of operation?

b. What are her implicit costs?

c. What are her opportunity costs?

Answers:

a. Jamie's accounting costs during the first year will be $145,000.

b. Her implicit costs include the salary and benefits she would have earned if she stayed at her current job.

c. Her opportunity costs are the potential benefits or profits she is giving up by leaving her current job.

Explanation: Jamie is considering leaving her current job, which pays $75,000 per year, to start a new company that develops applications for smartphones. 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. Jamie's accounting costs during the first year of operation will include the annual overhead costs and operating expenses, which amount to $145,000. These costs include salaries, office rent, utilities, and other expenses directly related to running the new company.

b. Jamie's implicit costs are the opportunity costs of leaving her current job. These costs include the salary she would have earned if she had stayed in her current job, as well as any other benefits or perks she would have received as an employee.

c. Jamie's opportunity costs are the potential benefits or profits she is giving up by leaving her current job and starting her own company. This includes the salary she would have earned, the stability of employment, and any growth opportunities she may have had in her current job.