23) Mitzi\'s Pet Salon hires you to determine the company\'s status. The data be
ID: 1106093 • Letter: 2
Question
23) Mitzi's Pet Salon hires you to determine the company's status. The data below provide information on the company's annual costs and revenues $25,000 Wages Interest paid on loans Other expenditures for factors of production Total Revenue 3,000 31,000 90,000 Mitzi spends at least 40 hours a week at her place of business. If she closed the salon, she could work for her competitor and earm $15,000 per year. She also owns the building that houses the salon and could rent it out for $18,000 per year if she closes her business. Calculate the economic cost and economic profit for Mitzi's Pet Salon. Would an accountant come to the same conclusion about the profitability of this firm? Explain.Explanation / Answer
Accounting profit = Total revenue - explicit costs
Economic profit = Total revenue - explicit costs - economic costs
Explicit costs are wages, interest paid on loans, factors of production
Economic costs are $15000 working for competitor, rent of 18000 if she closes the business
Total economic costs = $15000 + $18000 = $33000
Explicit costs = 25000 + 3000 + 31000 = 59000
Economic profit = $90000 - 59000 - 33000 = -2000, so Mitzi's pet salon will have an economic loss of $2000.
An accountant will only consider the accounting profit
Accounting profit = 90000 - 59000 = 31000, so an accountant will consider the salon to be profitable.
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