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Harvey quit his job at State University, where he earned $65,000 a year
Harvey quit his job at State University, where he earned $65,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $70,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 20,000 units of software at $50 for each unit. Of the $50 per unit, $45 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.
The accounting profit of Harvey's firm in the first year was
Multiple Choice
- $100,000.
- $77,000.
- $23,000.
- $1,000,000.
Expert Solution
Computation of Accounting Profit of Harvey's firm in the first year:
Total Revenue = Price * Quantity
= $50 * 20,000
= $1,000,000
Total explicit cost = Explicit cost per unit * Quantity
= $45 * 20,000
= $900,000
Accounting Profit = Total revenue - Total explicit cost
= $1,000,000 - $900,000
Accounting Profit = $100,000
So, the correct option is 1st "$100,000".
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