Question

Dmitri lives in Detroit and runs a business that sells guitars. In an average year, he receives $701,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $420,000; he also pays wages and utility bills totaling $247,000. He owns his showroom; if he chooses to rent it out, he will receive $9,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Dmitri does not operate this guitar business, he can work as a financial advisor and receive an annual salary of $32,000 with no additional monetary costs. No other costs are incurred in running this guitar business.
Required:
1. Identify each of Dmitri's costs in below as either an implicit cost or an explicit cost of selling guitars.
O The wages and utility bills that Dmitri pays
O The wholesale cost for the guitars that Dmitri pays the manufacturer
O The rental income Dmitri could receive if he chose to rent out his showroom
O The salary Dmitri could earn if he worked as a financial advisor

Answer 1

Answer:

EXPLICIT COST

The wholesale cost for the guitars that Dmitri pays the manufacturer

The wages and utility bills that Dmitri pays

IMPLICIT COST

The rental income Dmitri could receive if he chose to rent out his showroom

The salary Dmitri could earn if he worked as a financial advisor

Explanation:

Explicit cost: those which are actually incurred this means it represent accrued expenses or actual cash outlay.

Implicit cost: refers to the opportunity cost of a factor wasted opprtunity for weing deploy in the current project. These do not represent actual expenses but potential use of the factors