Ruby Vazquez has invested $80,000 in a hardware store. Business has been good, a
ID: 1124709 • Letter: R
Question
Ruby Vazquez has invested $80,000 in a hardware store. Business has been good, and the store shows an accounting profit of $10,000 for the last year. This profit is afte taxes and after payment of a $20,000 salary to Ms. Vazquez. This salary is less than the $40,000 she could make at another job. Considering the risk involved in the hardware business, she believes that a 15 percent after-tax rate of return is appropriate for this type of investment.
A. Given this information, calculate the economic profit earned by Ms. Vazquez.
b. What accounting profit would the firm have to earn in order for the firm to break even in terms of economic profit?
Explanation / Answer
A) Economic profit = accounting profit - opportunity cost = 10,000 - 40,000 = -$30,000 (loss)
B) In order to break even, the firm must make an accounting profit of $40,000 as this would leave the firm with an economic profit of $0
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.