Definition of economic costs Brian lives in Chicago and runs a business that sel

Question

Definition of economic costs

Brian lives in Chicago and runs a business that sells pianos. In an average year, he receives $735, 000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $435, 000; he also pays wages and utility bills totaling $255, 000. He owns his showroom; if he chooses to rent it out, he will receive $10, 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, receive an annual salary of $24, 000 with no additional monetary costs, and rent out his showroom at the $10, 000 per year rate. 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. The rental income Brian could receive if he chose to rent out his showroom The wholesale cost for the pianos that Brian pays the manufacturer The wages and utility bills that Brian pays The salary Brian could earn if he worked as an accountant Complete the following table by determining Brian's accounting and economic profit of his piano business. Accounting Profit Economic Profit

Explanation / Answer

Accounting Profit = Total revenue - Total Explicit costs

   = 735000 - [435000 + 255000]

   = 735000 - 690000

   = $ 45000

Economic Profit = Total Revenue - Total Implicit Costs - Total Explicit Costs

   = 735000 - [24000 + 10000] - [435000 + 255000]

   = 735000 - 34000 - 690000

= $ 11000

Conclusion:-

NOTE:- The difference between economic profit and accounting profit is that in the calculation of accounting profits, only the explicit costs are deducted from the total revenue earned by an organization/individual, whereas in the calculation of economic profits, the implicit costs as well as explicit costs both are deducted from the total revenue earned by an organization/individual.

Particulars Type of Costs 1) The rental income brian could receive if he chose to rent out his showroom. Implicit Cost 2) The wholesale cost for the Pianos that Brian pays the manufacturer. Explicit Cost 3) The wages and utility bills that Brian pays. Explicit Cost 4) The Salary Brian could earn if he worked as an accountant. Implicit Cost

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