A partial income statement from CenTer Realty, Inc. is shown below:
2011
Revenues
Revenue from sales of goods and services…………………….. $53,750,000
Operating costs and expenses:
Cost of products and services sold………………………………… $26,000,000
Selling expenses …………………………………………………………… $5,235,000
Administrative expenses …………………………………………………$4,237,000
Total operating costs and expenses ……………………. $35,472,000
Income from operations …………………………………………………………. $18,278,000
Interest expense (corporate bonds & loans)…………………………………… $875,000
Non-recurring legal expenses……………………………………………………….. $585,000
Income taxes …………………………………………………………………………. $10,245,000
Net income………………………………………………………………………………. $6,573,000
In 2011, CenTer Realty owned and occupied an office building in downtown Kansas City. The building could have been leased to other businesses for $3,000,000 in lease income for 2011. CenTer Realty also owned undeveloped land valued at $32,000,000. Owners of CenTer Realty can earn a 9 percent rate of return on funds invested elsewhere.
- In 2011, CenTer Realty’s total explicit costs of using market-supplied resources are $____________________.
- CenTer’s total implicit costs of using owner-supplied resources equals $_____________ in 2011.
- Total economic cost is $_________________________.
- CenTer’s accounting profit is $_________________________.
- Economic profit in 2011 is $_________________________.
- The Board of Directors believes CenTer’s owners can earn 14 percent, rather than 12 percent on funds invested elsewhere. At a 14 percent rate of return, economic profit in 2011 is $_________________________.
PART B: Consider some activity A for which the total benefits and total costs associated with
the different levels of A are measurable in dollars as tabulated below.
| Level of
Activity A |
Total
Benefit |
Total
Cost |
Marginal
Benefit |
Marginal
Cost |
Net
Benefit |
| 0 | 0 | 0 | |||
| 1 | 31.75 | 2.50 | |||
| 2 | 60.75 | 6.25 | |||
| 3 | 87.25 | 11.25 | |||
| 4 | 111.40 | 18.00 | |||
| 5 | 133.60 | 26.30 | |||
| 6 | 154.60 | 35.40 | |||
| 7 | 174.10 | 49.20 | |||
| 8 | 192.10 | 66.95 | |||
| 9 | 209.20 | 88.95 | |||
| 10 | 223.45 | 114.95 | |||
| 11 | 235.90 | 145.45 | |||
| 12 | 247.10 | 180.05 |
- Calculate marginal cost and marginal benefit. The optimal level of activity A is A* = ________.
- Explain carefully, using the logic of marginal analysis, why A = 4 is not the optimal level of activity A.
- Explain carefully, using the logic of marginal analysis, why A = 12 is not the optimal level of activity A.
- Now calculate the net benefit for each level of A and tabulate the values in the last column of the table. Inspect net benefit and determine the level of A that maximizes net benefit.
A* = __________.
Is this the same value as in part a?
