Ariana withdrew $400,000 out of her personal savings account and used it to star

Question

Ariana withdrew $400,000 out of her personal savings account and used it to start her new internet cafe. the savings account pays 2 percent interest per year. During the first year of her business, Ariana sold 2,000 cups of coffee for $2.50 per cup and 4,000 hours of internet time at $2.50 per hour. During the first year, the business has costs totaling $9,000. You may assume that there is no opportunity cost to Ariana's time.

a) What was Ariana's accounting profit for the year?

b) What was Ariana's economic profit for the year?

Explanation / Answer

a. Accounting profit = Revenues - Direct Costs = (2000 * 2.5 + 4000 * 2.5) - 9000
= 5000 + 10000 - 9000 = $6,000

b. Economic profit = Revenues - Direct Costs - Opportunity Costs

Opportunity cost = Interest earned on savings account = 0.02 * 400000 = $8,000

Thus, Economic Profit = 5000 + 10000 - 9000 - 8000 = $1,000

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