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Accounting vs Economic Costs

Suppose you work at Jiffy Lube, where you earn $15,000 per year. Your rich Uncle Walter recently died and left you an inheritance, so you are thinking of starting your own business. The business you wish to pursue will convert existing hybrid Toyota Prius automobiles to plug-in hybrid vehicles. You predict that you can retrofit approximately 100 units during the first year at a selling price of $12,000 per automobile upgraded. Your overhead (fixed) costs are estimated at $500,000, and your operating costs (materials, labor, etc.) are expected to be $1,200 per automobile. Note: Show your work and explain your logic for each of the following questions.

a. What are your first year accounting costs?

b. What are your first year economic costs?

c. What are your first year accounting profits (or losses)?

d. What are your first year economic profits (or losses)?

Solution Preview

Earnings working at Jiffy Lube 15,000 per year
Retrofit approximately 100 units during the first year at a selling price of $12,000 per automobile upgraded.
(fixed) costs are estimated at $500,000,
operating costs ...

Solution Summary

Solution helps in analyzing accounting costs.

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