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Calculating accounting and economic profits

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Jane decided to resign from her current job, at which she earned $58,000 per year. She started her own business using her $100,000 savings on which she was earning 5 % interest. In the first year, her revenue was $150,000 and her costs were as follows:

Rent: $25,000

Utilities: $12,000

Wages: $30,000

Materials: $20,000

1. What is Jane's accounting profit?

2. Did Jane make economic profit?

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Solution Summary

Solution describes the steps to calculate accounting and economic profits.

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Solution:

Implicit costs are related to forgone benefits of any transaction.
Implicit Costs=Salary income foregone + Interest income forgone
...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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