Brian lives in Denver and runs a business that sells pianos. In an average year,

Question

Brian lives in Denver and runs a business that sells pianos. In an average year, he receives $704,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $404,000; he also pays wages and utility bills totaling $286,000. He owns his showroom; if he chooses to rent it out, he will receive $3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Brian does not operate this piano business, he can work as an accountant and receive an annual salary of $20,000 with no additional monetary costs. No other costs are incurred in running this piano business. Identify each of Brian's costs in the following table as either an implicit cost or an explicit cost of selling pianos. Complete the following table by determining Brian's accounting and economic profit of his piano business.

Explanation / Answer

Good examples of explicit costs would be items such as wage expense, rent or lease costs, and the cost of materials that go into the production of goods. With these expenses, it is easy to see the source of the cash outflow and the business activities to which the expense is attributed.

An implicit cost is a cost that is represented by lost opportunity in the use of a company's own resources, excluding cash. The implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain project or decision, such as the loss of interest income on funds, or depreciation of machinery used for a capital project.

Explicit Cost
Implicit Cost
Explicit Cost
Implicit Cost

Economic Profit= 704000-404000-286000-3000-20000
=-9000
Accounting Profit=704000-404000-286000=14000

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