7.1 Dolores used to work as a high school teacher for $40 000 per year but quit

Question

7.1

Dolores used to work as a high school teacher for $40 000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20 000 from her savings (which paid 3 percent interest per year) and borrowed $30 000 from her uncle, to whom she pays 3 percent interest per year. Last year she paid $25 000 for ingredients and had revenue of $60 000. She asked Louis, an accountant, and Greg, an economist, to calculate her profit for her.

$  
Please enter a whole number, with no decimal point.

7.1

Dolores used to work as a high school teacher for $40 000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20 000 from her savings (which paid 3 percent interest per year) and borrowed $30 000 from her uncle, to whom she pays 3 percent interest per year. Last year she paid $25 000 for ingredients and had revenue of $60 000. She asked Louis, an accountant, and Greg, an economist, to calculate her profit for her.

Explanation / Answer

7.1) Accountant will only consider Explicit cost in order to find the profit.

Thus Expllicit cost=30000(0.03)+25000=259000

Revenue=60000

Accountant profit=Total revenue-Cost=60000-25900=34100

7.2) Economic profit=Total revenue-Total cost where Total cost=Explicit+Implicit cost

Implicit cost=40000+609=40600

Thus Economic profit=accounting profit-Implicit cost=34100-40600=-6500

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