Question

Economan has been infected by the free enterprise bug. He sets up a firm on extraterrestrial affairs. The rent of the building is $6,000, the cost of the two secretaries is $42,000, and the cost of electricity and gas comes to $7,000. There’s a great demand for his information, and his total revenue amounts to $130,000. By working in the firm, though, Economan forfeits the $65,000 he could earn by working for the Friendly Space Agency and the $6,000 he could have earned as interest had he saved his funds instead of putting them in this business.
a. What is his profit or loss by an accountant’s definitions?
Instructions: Round your answer to the nearest whole dollar and use a (-) if the number is negative.
Accounting profit is ($ . )
b. What is his profit or loss by an economist’s definitions?
Instructions: Round your answer to the nearest whole dollar and use a (-) if the number is negative.
Economic profit is ( $ . )

Answer 1

Answer:

There are two types of profit and costs in nay business, which are accounting costs/profit and the economic costs/profits.

Accounting costs include everything that is tangible or the monetary costs a firm pays, while the economic costs include the cost which is intangible(Opportunity costs) as well as tangible.

Here in this question, the profit of the firm therefore is,

a. From an accountant;s definition = 130000-(6000+42000+7000) = 75000.

b. From an economist's definition = 130000-(6000+42000+7000+65000+6000) = 4000.

Hope this helps you. Thankyou.

Answer 2

Answer:

$4,000

Explanation:

A) accounting profit only considers explicit revenues and costs which have clearly defined monetary values:

total revenue =              $130,000

rent =                               ($6,000)

secretaries' salaries =  ($42,000)

utilities =                          ($7,000)

accounting profit =        $75,000

B) economic profit considers both explicit revenues and costs plus opportunity costs. Opportunity costs are the extra costs or benefits lost resulting from choosing one activity or investment over another alternative.

economic profit = accounting profit - opportunity costs

• accounting profit = $75,000
• forfeited salary = ($65,000)
• lost interest revenue = ($6,000)

economic profit = $75,000 - $65,000 - $6,000 = $4,000