Question

gomez runs a small pottery firm. he hires one helper at $11,000 per year, pays annual rent of $6,000 for his shop, and spends $22,000 per year on materials. he has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $4,500 per year if alternatively invested. he has been offered $17,000 per year to work as a potter for a competitor. he estimates his entrepreneurial talents are worth $3,500 per year. total annual revenue from pottery sales is $70,000.

Answer 1

For a poetry farm, the capital gain is $70,000 while the economic profit is $6,000.

Why does accounting profit exist?

The owner's profit, or company profit, is what is meant by accounting profit. This profit may be obtained by totaling all business income and deducting specified costs from the total. The explicit cost in this context refers to expenses spent in the course of operating the firm, such as rent paid, labor costs paid, materials acquired, etc.

Briefing:

Accounting costs = Helper cost + Annual rent + materials = $(11,000 + 6,000 + 22,000) = $39,000

Accounting profit = Revenue - Accounting cost = $(70,000 - 39,000) = $31,000

Implicit costs = Interest from savings foregone + earning from alternative job + entrepreneurial talent

= $(4,500 + 17,000 + 3,500) = $25,000

Economic profit = Accounting profit - Implicit costs = $(31,000 - 25,000) = $6,000

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