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Look at the Data Below then answer/calculate the totals in the questions that follow
Look at the Data Below then answer/calculate the totals in the questions that follow. (Show Workings)
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Entrepreneur's potential economic profit from the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Answer these questions directly:
a) Creamy Crisp's explicit costs are:
b) Creamy Crisp's implicit costs (total) are :
c) Creamy Crisp's total economic costs (explicit + implicit costs) are:
d) Creamy Crisp's accounting profit is:
e) Creamy Crisp's economic profit is:
f) If Creamy Crisp's revenue fell to $286,000, what is the new accounting profit and the new economic profits?
Expert Solution
a) Computation of the explicit cost:-
Explicit costs = Annual lease on building + Utilities costs + Payments to workers
= $22,000 + $8,000 + $120,000
= $150,000
b) Computation of the implicit cost:-
Implicit costs = $50,000 + $6,000 + $80,000
= $136,000
c) Computation of the total economic costs:-
Total economic costs = Explicit costs + Implicit costs
= $150,000 + $136,000
= $286,000
d) Computation of the accounting profit:-
Accounting profit = $380,000 - $22,000 - $120,000 - $8,000
= $230,000
e) Computation of the economic profit:-
Economic Profit = $380,000 - $22,000 - $120,000 - $8,000 - $50,000 - $6,000 - $80,000
= $94,000
f) Computation of the new accounting profit:-
New accounting profit = $286,000 - $22,000 - $120,000 - $8,000
= $136,000
Computation of the new economic profit:-
New economic profit = $286,000 - $22,000 - $120,000 - $8,000 - $50,000 - $6,000 - $80,000
= $0
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