Question

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or foregone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.
Refer to the above information. The explicit costs of Harvey's firm in the first year were:

a. $605,000
b. $825,000
c. $655,000
d. $150,000

Answer 1

Answer:

Option (a) is correct.

Explanation:

Explicit costs refers to the cost that a company or a person incurred for doing certain activities.

The explicit costs of Harvey's firm in the first year were

= costs of production, packaging, marketing, employee wages and benefits, and rent on a building

= Cost per unit × Units sold

= $55 per unit × 11,000 units

= $605,000