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Accounting Profits

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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 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 was $900,000.

a). What is his yearly accounting profit for the business?

b). What is the yearly economic profit for the business?

Accounting profit = Total revenue - Explicit costs
Accounting profit = 1,000,000 - (900,000 + 40,000) = 60,000

b) Economic profit is the difference between total revenue and total economic cost
Economic profit = Total revenue - Explicit costs - Implicit cost

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a). What is his yearly accounting profit for the business?

Total Revenue = $1,000,000

Total Costs:

Salary Cost = $40,000
Total material and ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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