Rob is working as manager for fax, photo development, and photocopying firm for

Question

Rob is working as manager for fax, photo development, and photocopying firm for $25,000 per year (his salary) decides to open her own business. His revenue during the first year of operations is $120,000 and his expenses are as follows: Employee Salaries Supplies Rent Utilities Interest on Bank Loan $45,000 15,000 10,000 1,000 10,000 Calculate (a) the explicit costs, (b) the implicit costs, (c) the business profit, (d) the economic profit, and (e) the normal return on investment in this business.

Explanation / Answer

(a)Explicit Costs: Salaries to hired help + Supplies + Rent + Utilities + Interest on Bank Loan $45,000 + $15,000 + $10,000 + $1,000 + $10,000 = $81,000

(b)(b)Implicit Costs:$25,000

(c)Business Profit: Revenue-Explicit costs$120,000 $81,000 =$39,000

(d)Economic Profit: Revenue- Explicit and Implicit Costs$120,000 – ($81,000 + $25,000) =$14,000

(e)Normal Return on Investment= Business Profit-Economic Profit39,000-14,000=$25,000

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