A few years ago, a construction manager earning $70,000 per year working for a r
ID: 1253935 • Letter: A
Question
A few years ago, a construction manager earning $70,000 per year working for a regional home builder decided to open his own home building company. He took $100,000 out of one of his investment accounts that had been earning around 6% a year and used that money to start up the business. He worked hard the first year, hiring one employee (his only salary cost for the business was the $40,000 paid to this employee) and generated total sales of $1,000,000. Total material and subcontracted labor costs for the year were $900,000.5.2. What are the opportunity costs for the manager of being in this business relative to returning to his old job?
Explanation / Answer
Opportunity cost of capital = 6% of 100,000 = 6,000
OPeration Cost (O.C) of the manager = $70,000
Salary paid to employee = $40,000
Total material and subcontracted labor cost = $900,000
The Economic profit = Total revenue - Total economic Cost
Total economic Cost = Administrative cost + Opportunity cost of the factors of production
Total economic cost = 6,000 + 70,000 + 40,000 + 900,000
= 1,016,000
Total revenue = $ 1,000,000
Opportunity cost of capital = 6% of 100,000 = 6,000
Economic Profit = 1,000,000 - 1,016,000
= -16,000
He's actually having an economic loss of $16,000
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