Last year, Jarod left a job that pays $60,000 to run his own bike-repair shop. J
ID: 1104235 • Letter: L
Question
Last year, Jarod left a job that pays $60,000 to run his own bike-repair shop. Jarod's shop charges $65 for a repair, and last year the shop performed 3,000 repairs. Jarod's production costs for the year included rent, wages, and equipment. Jarod spent $50,000 on rent and $100,000 on wages for his employees. Jarod keeps whatever profit the shop earns but does not pay himself an official wage. Jarod used $20,000 of his savings to buy a machine for the business. His savings were earning an annual interest rate of 5 percent. Instructions: Round your answers to the nearest dollar and include a negative sign if appropriate. a. What is Jarod's annual accounting profit? $ 24,000 b. What is Jarod's annual economic profit? $16,000Explanation / Answer
Ans:
a) annual accounting profit = $45000
b) Annual economic profit = - $16000
Analysis
1) Computation of annual accounting profit
Particulars Amount
Revenue(3000 * $65) $195000
Less: cost
Rent ($50000)
wages ($100000)
Accounting profit $45000
2) Annual economic profit = Annual accounting profit - Opportunity cost of salary - Opportunity cost of interest
= $45000 - $60000 - ($20000 * 0.05)
= $45000 - $60000 - $1000
= - $16000
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