Bob and Jane decide to open their own business selling ergonomically correct office furniture that J Show more Bob and Jane decide to open their own business selling ergonomically correct office furniture that Jane has designed. Assume they operate this business from leased office space near their home. Also assume that they lease their computer equipment and data base software. Their lease agreements are for 1 year. The actual production of the furniture kits is subcontracted to various commercial factories as customer orders arrive and the unassembled kits are shipped via UPS to clients throughout the U.S. Their target market is small businesses including those run out of home offices. They have so much faith in the potential of Janes designs that they quit corporate jobs in marketing and MIS administration (which jointly had earned them $350000 per year) and sink $500000 (.5 million) of their own funds into this venture at the start of their first year to place advertising in trade journals and on the internet. (Assume this $500000 had previously been invested in a diversified portfolio that had been averaging a 10% annual before tax rate of return.) At the end of the year they calculated that they had the following costs and revenues. Total Revenues: $6.0 $6.0 million Costs: Payments to furniture subcontractors $4.0 $4.0 million Shipping Costs .1 million .1 million Lease Payments on Office Space and Computer Equipment &Software $ .5 million $ .5 million $ .5 million Overhead Expenses: Insurance utilities etc. $ .1 million .1 million Advertising on Internet & Magazines (Purchased at start of year) $ .5 million .5 million Additional Sales Expenses (phones business travel $ .2 million $ .2 million $ .2 million Entertaining clients etc.) a) What were Bob & Janes fixed costs during their first year of operation ? Explain your answer. b) Bob and Jane brag to their friends that their business earned a profit of $600000 in its first year. Would an economist agree? Explain and if not identify their economic profit level. Show less

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