Rather than put the $100,000 that his grandmother left him in a mutual fund and
ID: 1199649 • Letter: R
Question
Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000.
(Scenario: Accounting and Economic Profit) The implicit costs of Wang's Wicker Furniture Store is:
Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000.
(Scenario: Accounting and Economic Profit) The accounting profit of Wang's Wicker Furniture Store is:
Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund and earn 5% each year, Tommy Wang quit his job that paid $60,000 per year and used the $100,000 to start Wang's Wicker Furniture Store. He rented a showroom for $20,000 for the year, purchased $60,000 in wicker furniture, and incurred costs of $40,000 for sales help and advertising. In his first year, his revenue was approximately $150,000.
Explanation / Answer
1. Implicit cost takes into account the alternatives that have been sacrificed. thus, alternatives sacrificed are interest on deposits (100,000*5%) and salary foregone (60,000)
Total implicit cost = 5,000+60,000
= 65,000
Correct answer is (b)
2) Accounting profit does not account for the implicit cost, hence accounting profit is:
150,000 - 20,000 -40,000 -60,000
=30,000
Hence correct answer is (C)
3. Economic Profit accounts for the implicit as well.
Economic Profit = Accounting profit - implicit cost
= 30,000 - 65,000
= - 35,000
hence correct answer is (D)
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