Peggy-Sue’s cookies are the best in the world, or so I hear. She has been offere

Question

Peggy-Sue’s cookies are the best in the world, or so I

hear. She has been offered a job by Cookie Monster,

Inc., to come to work for them at $125,000 per year.

Currently, she is producing her own cookies, and

she has revenues of $260,000 per year. Her costs are

$40,000 for labor, $10,000 for rent, $35,000 foringredients,

and $5,000 for utilities. She has $100,000 of

her own money invested in the operation, which, if she

leaves, can be sold for $40,000 that she can invest at

10 percent per year.

Calculate her accounting and economic profits.

Advise her as to what she should do LO1

Explanation / Answer

Account profit (without opportunity cost): $260,000-$40,000-$35,000-$5,000=$180,000 (Accounting Profit) Economic profit (with opportunity cost): Economic Profit=accounting profit-opportunity cost opportunity cost=$125,000 (if he worked for cookie monster) +40,000*1.10 (her investment of what's left of hercompany)=$169,000 So we have: $180,000-$169,000=$11,000 So she should work her own business because of a positive economicprofit

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