Explain how a company can simultaneously be earning accounti

Explain how a company can simultaneously be earning accounting profits but at the same time earning economic losses (i.e. negative economic profits). Be as specific as possible in your answer while keeping your answer to no more than one paragraph.

Solution

Answer : The statement is correct as company is earning both accounting profit and economic loss at same time. If the company is able to cover its Explicit cost. There are two types of cost which are calculated such as explicit cost as well as Implicit Cost. Explicit cost are related to direct payment made by the company in order to recover the expenses such as wages paid, salary and rent where as Implicit cost are those which related to opportunity foregone. While calculating accounting profit only Explicit cost has been taken into account while calculating economic profit both cost has been taken into an account. Example : Suppose A earns revenue of $1,00,000 and wages paid $10,000 , raw material purchase$20,000 .In economic profit calculation A foregone a job of $80,000. This example shows A earning accounting profit of $70,000 where as economic loss of $10,000.