Question

Jackie owns and operates a website design business. To keep up with new technology, she spends $5,000 per year upgrading her computer equipment. She runs the business out of a room in her home. If she didn’t use the room as her business office, she could rent it out for $2,000 per year. Jackie knows that if she didn’t run her own business, she could return to her previous job at a large software company that would pay her a salary of $60,000 per year. Jackie has no other expenses.
a. How much total revenue does Jackie need to make in order to break even in the eyes of her accountant? That is, how much total revenue would give Jackie an accounting profit of just zero?


b. How much total revenue does Jackie need to make in order for her to want to remain self-employed? That is, how much total revenue would give Jackie an economic profit of just zero?

Answer 1

Answer:

a) Jackie's accounting profit of just zero, her revenue have to be $5000

b) The revenue would give Jackie an economic profit of just zero is $67,000

Explanation:

a)  $5,000 is the only cost that would have to add to the accounting profit calculation, which is the cost of upgrading her computer equipment every year as she runs the business out of a room in her home. For her accounting profit to be just equal to zero, her total revenue would have to be $5,000 to meet the requirement.

b)  Total revenue is $67,000, which includes the cost of equipment upgrade, the opportunity cost of not renting out the room, and the opportunity cost of Jackie’s time. All the costs that will add to the calculation for the economic profit of the company.  Jackie’s total revenue would have to be $67,000 to be just zero to meet the requirement.