Question

After​ graduation, you face a choice. One option is to work for a multinational consulting firm and earn a starting salary​ (benefits included) of ​$40,000. The other option is to use ​$6,000 in savings to start your own consulting firm. You could earn an interest return of 7 percent on your savings.
You choose to start your own consulting firm. At the end of the first​ year, you add up all of your expenses and revenues. Your total includes ​$10,000 in​ rent, ​$1,000 in office​ supplies, ​$24,000 for office​ staff, and ​$4,000 in telephone expenses, revenues totaled $147,600.
Based on the information provided, what were your total explicit costs? Your implicit costs? What was your accounting and economic profit this first year?

Answer 1

Answer:

Total explicit cost = $39,000

Implicit cost = $40,420

Accounting profit = $108,600

Economic profit = $68,180

Explanation:

Total explicit costs will be the total amount spent.

Therefore explicit costs =

Rent + office supplies + office staff + telephone expenses

Explicit costs = 10000 + 1000 + 24000 + 4000 = $39,000

Implicit costs= 40000 + (6000 * 0.07) =$40,420

Accounting profit = Total revenue - Total explicit costs

Accounting profit = $147,600 - $39,000 = $108,000

Economic profit = Total revenue - Total opportunity cost.

(Where total opportunity cost= explicit cost + implicit cost)

Therefore economic profits =

$147,600 - ($39,000+$40,420)

= $68,180.

Therefore,

Total explicit cost = $39,000

Implicit cost = $40,420

Accounting profit = $108,600

Economic profit = $68,180

Answer 2

Answer:

What were your total explicit costs?

Explicit costs are costs for which a direct payment is made by the customer, in this case the total direct payments made are:

Rent + office​ supplies + office​ staff + telephone expenses

= $10,000 + $1,000 + $24,000 + $4,000

Explicit cost = $39,000

What were your total implicit costs?

Impilicit costs are opportunity costs meaning, the cost incurred by not availing the next best alternative. In this case the implicit costs are:

Foregone wage and benefits + Foregone Interest + Savings used

Foregone Interest = $6,000*7%= $420

40,000 + 420 + 6,000

Implicit Cost = $46,420

What was your accounting and economic profit this first year?

Accounting profits = Total Revenues - Explicit costs

Here Revenue = $147,600

Accounting profits = $147,600 - $39,000

Accounting profits = $108,600

Economic profit = Total revenues - Explicit costs- implicit costs

Economic profit = $147,600 - $39,000 - $46,420

Economic profit = $62,180

The accounting profit for the first year was $108,600 and the economic profit for the year was $62,180