Question

fter working for 25 years as personal fitness trainers while raising their​ kids, three sisters cashed in a total of ​$120 comma 000 in bonds and decided to open a​ small, neighborhood fitness center. They spent the ​$120 comma 000 on exercise​ equipment, advertising, computer​ equipment, and other furnishings for the business. For the next 3​ years, they took in ​$140 comma 000 in revenue each​ year, paid themselves ​$35 comma 000 annually​ each, and rented a space in a strip mall for ​$25 comma 000 per year. Before the​ investment, their ​$120 comma 000 in bonds were earning interest at a rate of 7 percent. Are they now earning economic​ profits? Explain​ your answer.

Answer 1

Answer:

They are currently earning an economic profit of $1,600 per year

Explanation:

Economic profit = total revenue - accounting costs - opportunity costs

in this case:

opportunity costs = interest earned by their bond investment + the salaries of the three sisters = ($120,000 x 7%) + ($35,000 x 3) = $8,400 + $105,000 = $113,400

accounting costs = $25,000

total revenue = $140,000

Economic profit = $140,000 - $25,000 - $113,400 = $1,600