Glen spends at least 40 hours a week at his place of business. If he closed the
ID: 1092978 • Letter: G
Question
Glen spends at least 40 hours a week at his place of business. If he closed the company, he could work for his competitor earning $50,000 a year. He also owns the building the company operates in and could rent it out for $12,000 a year if he closed his business. He invested $50,000 which he withdrew from CD account that generates 5 % interest. The business records show the following
Wages expense $ 28,000.00
Interest expense paid on loans $ 6,000.00
Other expenditures for factors of production $ 34,000.00
Total Revenue $ 70,000.00
a.What is Glen Accounting profit
b.What is Glen Economic profit
Explanation / Answer
Wages expense $ 28,000.00
Interest expense paid on loans $ 6,000.00
Other expenditures for factors of production $ 34,000.00
Total Revenue $ 70,000.00
a Glen Accounting profit = Revenue - Expenses
= 70000 - (34000 + 6000+ 28000) = $2000
b Glen Economic profit = Revenue - Expenses - Opportunity Cost
Opportunity Cost = Earnings if he worked for his competitor + Rent + Interest
= 50000 + 12000 + 0.05 * 50000 = $64500
Glen Economic profit = 70000 - (34000 + 6000+ 28000) - 64,500 = - $62,500
He is getting a loss of $62,500
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