Barney decides to quit his job as a corporate accountant (which pays $10,000 a m

Question

Barney decides to quit his job as a corporate accountant (which pays $10,000 a month) and go into business for himself as a certified public accountant. He decides not to rent office space downtown, but instead sets up shop in his converted garage apartment, which he could rent out for $300 a month if he wasn’t using it as his own office. He must purchase office supplies worth $75 a month, and his monthly electricity bill has increased by $50 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $12,000 per month. a. What are Barney’s monthly explicit costs? b. What are Barney’s monthly implicit costs? c. What are Barney’s monthly economic costs?

Explanation / Answer

As per the question below are all the Costs Incurred

If he continued as Accountant, salary would have been = $10,000 per month

If he rented the garage, the would receive the rent amount = $300 per month

Office Supplies purchased = $75 per month

Monthly Electricity Bill = $50 per month

a) Explicit costs are the costs which are visible or tangible.

So here the visible costs which actually incurred are the Office supplies and Electricity cost

Explicit costs       = Office Supplies purchased + Monthly Electricity Bill

                                = $75 + $50 = $125 per month

b) Implicit costs are the costs which are occurred because of allocating the resources in another way. This is the opportunity cost which he lost because of utilizing other way.

So here he implicit cost will be the salary he would have been earned if continued as Corporate accountant and the rent amount he would have been earned from the garage.

Implicit cost        = Salary lost + Rent amount lost

                                = $10,000 + $300

                                = $10,300 per month

c) Economic cost is the total of Implicit Cost and Explicit cost.

So, Economic cost = $10,300 + $125

                                    = $10,425 per month.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.