A man managing a photocopying establishment for 35000 per ye

A man managing a photocopying establishment for $35,000 per year decides to open his own duplicating shop. His revenue during the first year of operations is S150,000 and his expenses are as follows: Salaries to hired help Suplies Rent Utilites Interest on bank loan Calculate (a) the explicit costs (b) the implicit costs, (c) the business profit, (d) economic profit and (e) the normal return on investment in this business 3. $50,000 30,000 $25,000 $3,000 $25,000

Solution

(a) Explicit cost ($) = Salaries + Supplies + Rent + Utilities + Interest on loan

= 50,000 + 30,000 + 25,000 + 3,000 + 25,000

= 133,000

(b) Implicit cost = Income foregone = $35,000

(c) Business profit ($) = Revenue - Explicit cost = 150,000 - 133,000 = 17,000

(d) Economic profit ($) = Business profit - Implicit cost = 17,000 - 35,000 = - 18,000

(e) Normal return on investment = Economic profit / Revenue = - $18,000 / $150,000 = - 0.12 = - 12%