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Calculation of economic profit, accounting profit and decision making according to profit.

John HAS WORKED AS A CONSALTANT IN THE it INDUSTRY FOR A NUMBER OF YEARS. His annual income is $1000,000 per year. He is considering establoishing his own IT Consulting firms and expects to generate revenues of $3,475,000 during the first year. Compensation paid to other employees is expected to total $1,825,000. Other operating expenses(rent, supplies, utilities...) are equipied , office furniture etc. The capital equiped (purchased with part of the loan) will cost $1,200,000. At the end of one year, the firm could sell the equipement, office furniture maintains it value for the entire period. The monetary value to John of working for himself in his firm rather than being employed by another firm is $25,000. Unless explicity stated stated each part assumes the initial values of the original problem stated above. (In other words, useless explicity stated, each part is considered in isolation)

a. Describe pretax accounting profit for the first year of this venture.

b. Determine the pretax economic profit for this venture for the first year. Interpreted.

c. Depends on the profits in the first year , should John go ahead with this venture? describe.

d. Suppose that instead of IT market falls and John purchased the office furnished and equiped with his own funds? How would this impact your answers to part a-c? Show work and describeany assumption made.

e. Suppose the iT market falls and John and John could now hired as an IT consultant for only $60,000. How would this impact your answers to parys a-c? Which senario, e or f, is more realistic? Beiefly describe.

f. As a result of the change in market condition disscused in the part e. Jo0hn\'s l;abour expense for other employees is now 85% of the original total. John\'s salary is cionsidered with the conditions descriped inpart e.

g. Assume intersted of e, that the IT market rebounds and that John could now be highered in as an IT Consultant for $13,000. Disscuss How an implement impact your answers to pat a-c.

h. In this worls problrem we have made a number of simplifyng assumptions. Suggest two factories whick would make this problem more realisytic and might impact John\'sdecision to operate/shutdown his consultinbg bussiness. Elucidate how each ecconomic profit. You nees not us ethe actual numbers in measuring th effects.)

Business Economics, Economics

  • Category:- Business Economics
  • Reference No.:- M922603

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