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    Economic cost/accounting profit/economic profit

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    Audio engineer quit job & gave up salary of $175,000 per year to start own business. Partial income statement below:

    Revenues: 2010
    Rev from sales of products / services $970,000

    Operating costs & expenses:
    Cost of products / services sold $355,000
    Selling expenses $155,000
    Admin expenses $45,000

    Total operating costs $555,000

    Income from operations $415,000
    Interest expense (bank loan) $45,000
    Legal start up expen $28,000
    Income tax $165,000

    Net income $177,000

    Owner spent $100,000 of his savings to pay for capital startup cost for new business. In 2010 the owner could have taken earned 15% return by investing in stocks of other new companies with lower risk levels than starting up his own company.

    1). what are total explicit, total implicit, total economic cost in 2010

    2). what is the accounting profit in 2010

    3). what is the economic profit in 2010

    4). given the answer for #3, evaluate the new owner's decision to leave his previous job and start his own company?

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    Solution Preview

    1. Explicit costs are those costs which are payments made to others for operating the business. The total explicit costs would be
    Cost of products / services sold $355,000
    Selling expenses $155,000
    Admin expenses $45,000
    Interest ...

    Solution Summary

    The solution explains how to calculate economic cost, accounting profit and economic profit