Sally quit her job as an auto mechanic earning $50,000 per year to start her own

Question

Sally quit her job as an auto mechanic earning $50,000 per year to start her own business. To save money she operates her business out of a small building she owns which, until she started her own business, she had rented out for $10,000 per year. She also invested her $20,000 savings (which earned a market interest rate of 5% per year) in her business. You are given the following information about the first year of her operations.

Cost of labor              40,000

Cost of materials       15,000

Equipment rental        5,000

a.   Calculate her explicit costs.

b.   Calculate her implicit costs.

Explanation / Answer

Explicit cost also called the accounting costs, are out of pocket cost,such as expenses of labor,raw material and rent.

Implicit costs are costs a business incurs without actually spending money.They are estimates of the value of alternative activities you have sacrificed.

Explicit cost = 50000+40000+15000+5000 = 120000

Implicit cost = 20000+10000 = 30000

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