Question

Van lives in Houston and runs a business that sells pianos. In an average year, he receives $851,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $476,000; he also pays wages and utility bills totaling $281,000. He owns his showroom; if he chooses to rent it out, he will receive $71,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Van does not operate this piano business, he can work as an accountant, receive an annual salary of $34,000 with no additional monetary costs, and rent out his showroom at the $71,000 per year rate. No other costs are incurred in running this piano business.
Identify each of Andrew's costs given below as either an implicit cost or an explicit cost of selling guitars.

a. The wholesale cost for the guitars that Andrew pays the manufacturer
b. The rental income Andrew could receive if he chose to rent out his showroom
c. The salary Andrew could earn if he worked as an accountant
d. The wages and utility bills that Andrew pays

Answer 1

Answer: a. Explicit Cost

b. Implicit cost

c Implicit cost

d. Explicit cost

Explanation:

Implicit cost is refers to the cost which has happened already but might not be shown as a separate expense. It is the opportunity cost which occurs when internal resources are used towards a project. Explicit costs, are the tangible assets and also the monetary transactions that can be found in real business opportunities.

Based on the explanation above, the answer to the following include:

a The wholesale cost for the guitars that Andrew pays the manufacturer = Explicit cost

b. The rental income Andrew could receive if he chose to rent out his showroom = Implicit cost

c. The salary Andrew could earn if he worked as an accountant = Implicit cost

d. The wages and utility bills that Andrew pays = Explicit cost