Question

Josephine quits her $40,000 a year job to start her own business. She rents an office for $15,000 a year, pays wages and salaries of $50,000 a year, utilities of $4,000 a year, and materials of $20,000. She uses her own car for sales work rather than leasing an equivalent car for $6000 a year. If revenues are $140,000, her accounting profit and economic profit are respectively.
a. $45,000 and $11,000.
b. $51,000 and $5000.
c. $45,000 and $5000
d. $51,000 and $45,000.

Answer 1

Answer:

b. $51,000 and $5000.

Explanation:

According to the scenario, computation of the given data are as follows,

Total Revenues = $140,000

Explicit cost = $15,000 + $50,000 + $4,000 + $20,000 = $89000

Implicit cost (opportunity cost) = $40,000 + $6,000 = $46,000

So, we can calculate accounting profit and economic profit by using following formula,

Accounting Profit = Total revenue - Explicit cost

By putting the value, we get

= $140,000 - $89,000

= $51,000

Economic Profit = Total revenue - Explicit cost - Implicit cost

By putting the value, we get

= $140,000 - $89,000 - $46,000

= $5,000