Shen lives in Miami and runs a business that sells guitars. In an average year,
ID: 1201966 • Letter: S
Question
Shen lives in Miami and runs a business that sells guitars. In an average year, he receives $842,000 from selling guitars. Of this sales revenue, he must pay the manufacture a wholesale cost of $4520,000 he also pays wages and utility bills totaling $301,000. He wons his showroms if he chooses to rent it out, he will receive $38,000 in rent per year. Assume that the value of the showroom does not depreciate ever the year. Also, if Shen does not operate this guitar business, he can work as an accountant and receive an annual salary of $48,000 with no additional monetary costs. No other costs are incurred in running this guitar business. Identify each of shen's costs in the following table as enter an implicit cost at an explicit cost of selling guitars.Explanation / Answer
(a)
Wholesale cost of guitar - Explicit cost
Salary Shen could earn - Implicit cost (Since this is an earning foregone, it is an opportunity cost)
Wages and utility - Explicit cost
Rental income if he rented showroom - Implicit cost (Since this is an earning foregone, it is an opportunity cost)
(b)
Accounting profit = Income (Revenue) - Sum of explicit costs (as defined above)
= $842,000 - $452,000 - $301,000
= $89,000
Economic profit = Accounting profit - Sum of all implicit costs (as defined above)
= $89,000 - $38,000 - $48,000
= $3,000
(c)
If his goal is to maximize economic profit, he will not stay in guitar business because economic profit he would earn as accountant is $86,000 [His income as accountant + the rental income he will receive by renting out].
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.