A few years ago, a construction manager earning $70,000 per year working for a r

Question

A few years ago, a construction manager earning $70,000 per year working for a regional home builder decided to open his own home building company. He took $100,000 out of one of his investment accounts that had been earning around 6% a year and used that money to start up the business. He worked hard the first year, hiring one employee (his only salary cost for the business was the $40,000 paid to this employee) and generated total sales of $1,000,000. Total material and subcontracted labor costs for the year were $900,000.

1.Caculate accounting profit.

2. what are the opportunity cost for the manager of being in this business relative to returning to his old job?

Explanation / Answer

1. Accounting profit = Sales - Costs = 1,000,000 - (900,000 + 40,000) = $60,000

2. Opportunity cost = Old salary + interest on capital employed = 70,000 + 0.06*100,000 = $76,000 per year

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