Scenario 14-1 As part of an estate settlement Mary received $1 mi llion. She dec
ID: 1218266 • Letter: S
Question
Scenario 14-1
As part of an estate settlement Mary received $1 mi
llion. She decided to use the money to purchase a
small business in Anywhere, USA. If Mary would have
invested the $1 million in a risk-free bond fund
she could have made $100,000 each year. She also quit
it her job with Lucky.Com Inc. to devote all of her
time to her new business; her salary at Lucky.Com I
nc. was $75,000 per year.
Refer to Scenario 14-1
. At the end of the first year of operating her new
business, Mary's
accountant reported an accounting profit of $150,00
0. What was Mary's economic profit?
a. $25,000 loss
b. $50,000 loss
c. $25,000 profit
d. $150,000 profit
13.
Refer to Scenario 14-1
. What are Mary's opportunity costs of operating he
r new business?
a. $25,000
b. $75,000
c. $100,000
d. $175,000
3
14.
Refer to Scenario 14-1
. How large would Mary's accounting profits need to
be to allow her to attain
zero economic profit?
a. $100,000
b. $125,000
c. $175,000
d. $225,000
Explanation / Answer
1. Economic Profit = Profit earned - Costs
Here Costs are all the costs
So Economic Profit = 150000 - 100000 - 75000 = -25,000
Here 150000 is accounting Profit
75000 is salary cost from job she left
and 100000 is interest cost
2. Opportunity Costs is similar costs as calculated above
So opportunity cost = 100000 + 75000 = 1,75,000
75000 is salary cost from job she left
and 100000 is interest cost
3. Accounting profit in order to attain zero economic profit is calculated as follows
Economic Profit = Profit earned - Costs
0 = Profit earned - 175000
So Profit earned = 1,75,000
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