Explore BrainMass
Share

# Determining equations for accounting and economic profits

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Three college students consider the option of forming a lawn care and landscaping business during their summer vacation. They estimate the following costs:

Insurance \$2,600
Equipment Rental Fees 1,000
Fuel and Supplies \$4 per lawn
Miscellaneous Expenses \$2 per lawn

Their projected revenue depends on the number of lawns serviced. The price per job is \$30. The going wage for a typical unskilled college student is about \$2,400 for the summer months. Let Q = the number of lawns serviced.

a) Derive an equation for total accounting profit.
b) Derive an equation for total economic profit.
c) Realistically, the small business should expect to service about 200 lawn jobs during the summer. Should the three students launch the business? Explain your answer in terms of economic and accounting profit.

https://brainmass.com/economics/personal-finance-savings/determining-equations-for-accounting-and-economic-profits-405188

#### Solution Preview

a) Derive an equation for total accounting profit.
Explicit costs=Insurance+ Equipment Rental fees+ Fuel and other supplies+ Misc. Expanses
=2600+1000+4Q+2Q
=3600+6Q
Total Revenue=Price Per job*number of lawns serviced=30*Q=30Q
Accounting profit=Total Revenue-Explicit costs
...

#### Solution Summary

Solution determines the equations for accounting and economic profits in the given case.

\$2.19

## The equation transfer price = variable cost + opportunity cost is

Here is the final half:

............................

16

The equation transfer price = variable cost + opportunity cost is:

a. A formula for market based transfer prices
b. A formula for all types of transfer prices
c. A formula that is used in all manufacturing firms in the U.S.
d. None of the above are correct responses to this question

17

Hershey's North American Division has net operating income of \$200,000 and average invested capital of \$1,000,000. Tootsie's management team seeks a minimum 12% return on invested capital. Given these facts, it is possible to conclude that the North American Division has:

a. An economic profit of \$120,000
b. An economic profit of \$200,000
c. An economic profit of \$80,000
d. There is not enough information to calculate economic profit for this division

18

Management is considering purchasing a Model B300 machine to use in addition to the company's present Model B100 machine. This will increase the company's production and sales. The increase in volume will be large enough to require increases in variable manufacturing overhead, fixed and selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead. Which of the following items would be considered relevant to the decision?

b. Depreciation - Model B100 Machine
c. None of the selections are correct
d. Both of the options are relevant

19

Jeff is manager of a shopping mall. In this position, he is responsible for attracting new stores, collecting rents, paying bills, managing staff, and managing all aspects of the mall's premises and equipment. In fact, Jeff help select the mall location and mall layout. Jeff's boss indicates that the mall's ROI is above the benchmark rate of 15%. Based on this information, it is likely that Jeff's mall is considered to be:

a. The mall is both a cost and profit center
b. A cost center
c. An investment center
d. A profit center

20

Costs that will continue if an ongoing operation is changed or abandoned are commonly referred to as:

a. Unavoidable costs
b. Discontinuation costs
c. Avoidable costs
d. Differential costs

21
If the total sales activity variance is \$7,500 favorable, and the total flexible budget variance is \$8,750 favorable, then the total master budget variance must be:

a. \$1,250 favorable
b. \$16,250 favorable
c. cannot be determined from the given information
d. \$1,250 unfavorable

22

Hershey is considering the acquisition of Dots-R-US Candy. They perform an analysis and determine that it has a positive NPV. Hershey decides to make the acquisitioin. this is an example of:

a. Accounting decisions
b. Financing decisions
c. Payback decisions
d. Investment decisions

23
Which of the following factors are considered relevant when evaluating equipment-replacement decisions?

a. Projected operating cost of the proposed investment
b. The book value of the old machine
c. Both projected revenues and operating costs are relevant
d. Projected revenues of the proposed investment

24

A standard cost is a unit cost that

a. the company attained in the most recently completed period.
b. should be attained.
c. is the average cost for the industry.
d. should never be revised.

25
The automatic rejection of one investment upon the acceptance of another investment is an example of the definition of:

a. inflation.
b. differential analysis.
c. mutually exclusive.
d. unequal time periods.

26
You perform a regression analysis using rooms rented and total room cleaning costs as your independent and dependent variables, resepectively. You obtain the following data. Intercept = \$5,000; X variabale = \$11. The correct formula for predicting future room cleaning costs is:

a. Y = \$11 + \$5,000 X
b. \$5,000 = \$10 + bX
c. Y = \$5,000 + \$11X
d. A formula cannot be determined from the data provided

27
The DuPont ROE formulation is a valuable analysis tool. You are using it in your planning efforts in order to raise your firm's ROE from 15% to 17%. Which of the following will help you accomplish this increase in ROE?

a. Increase financial leverage
b. Lower ROS
c. Reduce asset turnover
d. All of the above will result in an increase in ROE
e. None of the above are appropriate ways of raising ROE

===================

Thanks again!

View Full Posting Details