Estimate the owner decision to start sound devices

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Reference no: EM1362100

At the beginning of the year, an audio engineer quit her job and gave up a salary of $100,000 in order to start her own business, Sound Devices, Inc. The new company builds, installs, and maintains custom audio equipment for businesses that require high-quality audio systems. A partial income statement for Sound Devices, Inc. is shown below:

Revenues 2008
Revenue from sales of product and services $970,000
Operating costs and expenses
Cost of products and services sold 355,000
Selling expenses 155,000
Administrative expenses 45,000
Total operating costs and expenses $555,000

Income from operations $415,000
Interest expense (bank loan) 45,000
Legal expense to start business 28,000
Income taxes 165,000
Net income $177,000

To get started, the owner of Sound Devices spent $200,000 of her own personal savings to pay for the capital equipment used in the business. In 2008 the owner could have earned a 5 percent return by investing in stocks of other new businesses with risk levels similar to the risk level in Sound Devices.

(a) Evaluate the owner's decision to start Sound Devices.

(b) Are any of the above costs likely to be one-time costs? If so, how would this affect your answers? Explain.

Reference no: EM1362100

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