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Accounting profits and economic profits

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Page 370 problem 3

Howard Bowen is a large cotton farmer. The land and machinery he owns has a current market value of $4,000,000. Bowen owes his local bank $3,000,000. Last year Bowen sold $5,000,000 worth of cotton. His variable operating costs were $4,500,000; accounting depreciation was $40,000 although the actual decline in value of Bowen's machinery was $69,999 last year. Bowen paid himself a salary of $50,000 which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $30,000. Bowen can invest any funds that would be derived, if the farm were sold, ot earn 10 percent annually (Ignore taxes)

a. Compute Bowen's accounting profits
b. Compute Bowen's economic profits.

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Solution Summary

This explains the concepts of accounting profits and economic profits

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Accounting profits=
Total accounting revenues- total accounting expenses= 5000000-4500000-40000-50000-400000=$10000

Economic profits= Total revenues- ...

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