5. Calculating Aa Aa Jan, who has been working for a consulting firm, is thinkin
ID: 1112231 • Letter: 5
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5. Calculating Aa Aa Jan, who has been working for a consulting firm, is thinking of starting his own consulting company. He has determined that, based on how much business he would likely be doing, his yearly costs would be E60 000 for rent on the office building, £200 000 for employee wages and salaries, and E7000 for materials and utlities. In addition, in order to start the business, he would have to invest E100 000 of his own funds. He plans to manage the business, which would require him to quit his job at the consulting firm, where he interest rate (or rate of return) on investments in the economy is 6%. currently earns E60 000 per year. Finally, the If Jan starts his business, his total explicit cost per year would be If Jan starts his business, his total cost (TC) per year would be GradedExplanation / Answer
explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials.
Total explicit cost=rent+wages and salaries+materials and utilities.
Total explicit cost=60,000+200,000+7000=267,000
Total cost=Total explicit cost-Total implicit cost
Implicit cost=An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. It represents an opportunity cost that arises when a company allocates internal resources toward a project without any explicit compensation for the utilization of resources. This means that when a company allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere.
Implicit cost=investment+opportunity cost of quitting the job-interest earned on investment
100,000+60,000+6000=166,000(return on investment=6%of 100,000=6000)
Total cost=267,000-166,000=101,000
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