2 Use the information below to complete the following questi

2. Use the information below to complete the following question(s): The following is information for the Creamy Crisp Donut Company: Entrepreneur\'s paid salary in this business $40,000 Annual lease on building $25,000 Loan expenses (Interest payments) $6,000 Annual revenue from operations $400,000 Payments to workers as wages $110,000 Utilities (electricity, water, trash) costs $15,000 Implicit value of entrepreneur\'s talent in a similar entrepreneurial activity $90,000 Entrepreneur\'s investment in the business is $60,000 and the normal rate of return on capital is 10%-$6,000 Creamy Crisp\'s accounting profit is: Creamy Crisp\'s economic profit is:

Solution

Answer:

Creamy Crisps accounting profit = Revenue - Explicit cost. That is ($ 400000)- ($ 25000 + $ 6000 + $110000 + $ 15000) = $ 244000.

Creamy Crisps economic profit = Total Revenue - (Explicit cost + Implicit Cost). that is ($ 400000) - ($ 25000 + $ 6000 + $110000 + $ 15000 + $ 40000 + $ 90000 + $ 6000) = $ 108000.

Implicit costs are the costs which do not come under accounting process. In the above example they are: Entrepreneur\'s paid salary in the business, the implicit value of entrepreneurial\'s talent in similar business activity and foregone interest by investing the money. Implicit cost = 40000 + 90000 + 6000 = $ 136000