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Accounting Profit and Economic Profit

Suppose you and a friend are thinking about opening a fast-food vending business at a nearby resort during your summer break. This will entail serving pizzas out of a vendor's truck. This is an alternative to working a factory job where you can each earn $7,000 over the summer break.

A fully equipped truck could be leased for $9,000. Insurance and other miscellaneous operating expenses will total $1,000. Given your projected sales revenues of $33,000, you anticipate your variable costs to total $8,000. You and your partner have just enough money in the bank to cover all of the summer's fixed and variable costs of the business. If you pull that money out of the bank, then you will collectively forego $1,500 in interest income for the summer.

1. What would be the accounting profit for your business?

2. What would be the economic profit for your business?

3. Should they go ahead with their plan?

Solution Preview

Suppose you and a friend are thinking about opening a fast-food vending business at a nearby resort during your summer break. This will entail serving pizzas out of a vendor's truck. This is an alternative to working a factory job where you can each earn $7,000 over the summer break.

A fully equipped ...

Solution Summary

Accounting Profit and Economic Profit are determined.

$2.19