Temel leaves his job as a general manager from the company he is working where h

Question

Temel leaves his job as a general manager from the company he is working where he was earning 240,000 TL annualy. Fadime has 1 million TL worth of deposits at a bank and other financial papers yielding annual earnings of 300,000 TL for her. Dursun has inherited from his late father textile machines worth 500,000 TL at the going market prices, which he has been renting to other companies for an annual rent of 200,000 TL. Fadime puts into the new company 1 million TL, Dursun puts his machines as capital of the new company. Temel puts nothing. In the new company they decide to appoint Temel as the new general manager with an annual net salary of 100,000TL. At the end of first year of operations the accountant presents the shareholders wit the following report

total revenue : 2,220,000 TL

TCF : 250,000 TL

TVC of labor : 650,000 TL

TVC of raw materils : 600,000 TL

temel's annual salary : 100,000 TL

profits before corporate tax : 120,000 TL

profit to be distributed : 480,000 TL

discuss and evaluate the accountant's report from an economist's point of view

Explanation / Answer

480,000 is the accounting profit. This is calculated based on the actual revenue and actual incurred costs (explicit costs).

But from an economic perspective; an economic profit is considered. It is calculated based on all costs.

That is both explicit and implicit costs.

Explicit costs are directly incurred costs as represented in the above problem.

Where as the implicit costs are the implied costs, or in other sense these costs are incurred due to a lost opportunity, if a resource is alternatively used.

For example Fadmie has lost an opportunity to earn 300,000 as bank interest by investing in the company.

Similarly Dursen has lost an annual rent of 200,000 by putting his machinery in the company.

And Temel has lost 140,000 by working in the new company; he is having an opportunity to earn 240,000 per annun in his previous company, but he has foregone this salary and joined in the new company for 100,000 TL, thus loosing 140,000.

So the total opportunity costs of all the three friends are 300,000+ 200,000 + 140,000

                                                                                          = 640,000.

There are the implied costs.

Economic profit = Accounting profit minus implied cost.

                       = 480,000 – 640,000

                       = – 160,000 TL.

Thus if we consider the economic profit, the firm is actually incurring a loss of 160,000 TL

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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