Tara is considering leaving her current job, which pays $56,000 per year, to start a new company that manufactures a line of special pens for personal digital assistants. Based on market research, she can sell about 160,000 units during the first year at a price of $20 per unit. With annual overhead costs and operating expenses amounting to $3,160,000, Tara expects a profit margin of 25 percent. This margin is 6 percent larger than that of her largest competitor, Pens, Inc.
a. If Tara 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?
b. Suppose that Tara’s estimated selling price is lower than originally projected during the first year. How much revenue would she need in order to earn positive accounting profits? Positive economic profits?