Question

Dixie, a cattle ranch owner, earns $350,000/month in revenue. Her monthly cost include: administrative cost: $35,000, Feed: $40,000, Equipment and maintenance: $55,000, Labor: $90,000, Transportation: $20,000, Miscellaneous: $35,000, Foregone rent for the land used for cattle grazing $18,000, Cost of her daughter’s time that helps on weekends: $4,000, owner’s salary: $15,000. Dixie’s accounting and economic profit respectively are

Answer 1

Answer:

Accounting profit = $60000

Economic profit =  $38000

Explanation:

Accounting profit is the net income of a company, it is the difference between revenue and expenses. This expenses are wages, transportation cost, cost of raw materials and so on. It makes use of only explicit cost.

Economic profit makes use of both implicit cost (opportunity) and explicit costs. It does not only considers expenses but also considers opportunity costs for making one decision instead of the other

Given that revenue = $350000

Explicit cost = Administrative cost + Feed + Equipment and maintenance + Labor + Transportation + Miscellaneous + owners salary = $35,000 + $40,000 + $55,000 + $90,000 + $20,000 + $35,000 + $15000 = $290000

Implicit cost = opportunity cost = Cost of her daughter’s time that helps on weekends + Foregone rent for the land used for cattle grazing = $18000 + $4000 = $22000

Accounting profit = Revenue - Explicit cost = $350000 - $290000 = $60000

Economic profit =  Revenue - Explicit cost - Implicit profit = $350000 - $290000 - $22000 = $38000