Purchase Solution

Accounting Versus Economic Profit

Not what you're looking for?

Ask Custom Question

Accounting Versus Economic Profit
(Explicit and Implicit Costs)

Exhibit 1 represents the annual income statement of Joe's Clothing Store. Joe worked full time in the store and invested $30,000 to buy the store and stock it with merchandise. He recently turned down an offer of a salaried position paying $10,000 per year to manage another store. He didn't pay himself a salary during the year.

Exhibit 1 (see attachment)

REVENUES COSTS
Sales $57,000 Wholesale clothing $30,000
Equipment $2,000
Labor $15,000
Utilities $1,000
Total Revenue $ 57,000 Total Cost $48,000

a. According to Exhibit 1, what is Joe's explicit cost? Accounting profit?
b. What major items did he exclude from his costs from an economic standpoint?
Hint: opportunity cost
c. Suppose Joe could have earned 10% interest if he, instead of buying the store and merchandise, invested the $30,000 in the bank. How much interest is he losing per year by keeping the money invested in the store?
d. In light of your answers to b. and c., calculate Joe's implicit cost, opportunity cost and economic profit or loss.

Attachments
Purchase this Solution
Solution Summary

This explain the discussion of accounting versus economic profit

Solution Preview

Accounting Versus Economic Profit
(Explicit and Implicit Costs)

Exhibit 1 represents the annual income statement of Joe's Clothing Store. Joe worked full time in the store and invested $30,000 to buy the store and stock it with merchandise. He recently turned down an offer of ...

Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

View More Free Quizzes
Related BrainMass Solutions

  • Incurring economic profit or loss

    let us take an example of Accounting Versus Economic Profit (Explicit and Implicit Costs) Exhibit 1 represents the annual income statement of Joe's Clothing Store.

  • What are some examples that lead to economic profit or loss, but not necessarily a recognizable event for accounting purposes?

    let us take an example of Accounting Versus Economic Profit (Explicit and Implicit Costs) Exhibit 1 represents the annual income statement of Joe's Clothing Store.

  • Accounting vs. economic costs

    This should be accounting costs+implicit costs =3160000+56000 =$3216000= Answer This discusses the concept of Accounting versus economic costs.

  • Transfer prices, relational contracts, and prediction markets

    An example of economic profit versus accounting profit in my experience was the $5000 economic profit gained by my organization in a situation where the opportunity costs amounted to $10,000, which generated a revenue of $15,000.

  • difference between accounting and economic profit

    How would you define the difference between accounting and economic profit? What are some examples that demonstrate the difference between accounting and economic profit?

  • Economic Profit Vs Accounting Profit

    This solution illustrates the difference between economic profit and accounting profit by giving a step-by-step example that calculates and contrasts economic profit and accounting profit, incorporating product costs, revenue generated, and opportunity

  • Supply of Loanable Funds

    How do the concepts of accounting profit and economic profit differ? Why is the economic profit smaller than accounting profit. What are the three basic sources of economic profit?

  • Should businesses profit from war?

    322927 Should businesses profit from war Should businesses profit from war? Defend your answer with economic principles and the reasons why. Let us first differentiate accounting profit and economic profit. Accounting profit means revenue - cost.

  • Accounting Profits

    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 -

View More Related Solutions