Question

Darnell lives in Dallas and runs a business that sells guitars. In an average year, he receives $704,000 from selling guitars. Of this sales revenue, he must pay the manufacturer a wholesale cost of $404,000; he also pays wages and utility bills totaling $286,000. He owns his showroom; if he chooses to rent it out, he will receive $3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Darnell does not operate this guitar business, he can work as an accountant and receive an annual salary of $20,000 with no additional monetary costs. No other costs are incurred in running this guitar business.Identify each of Jake's costs given below as either an implicit cost or an explicit cost of selling guitars. 1. The wages and utility bills that Darnell pays. 2. The rental income Darnell could receive if he chose to rent out his showroom. 3. The salary Darnell could earn if he worked as a financial advisor. 4. The wholesale cost for the guitars that Darnell pays the manufacturer.

Answer 1

Answer:

1. The wages and utility bills that Darnell pays.

286,000 explicit cost (accounting)

2. The rental income Darnell could receive if he chose to rent out his showroom.

3,000 x 12 months = 36,000 implicit cost (economic)

3. The salary Darnell could earn if he worked as a financial advisor.

20,000 implicit cost (economic)

4. The wholesale cost for the guitars that Darnell pays the manufacturer.

704,000 explicit cost (accounting)

Explanation:

The explicit cost are those which occurs and are represented in the accounting.

While the implicit cost represent the opportunity cost which is the best alternative rejected for taking the current course of action. They are considered for the economic profit