Last year, Jarod left a job that pays $60,000 to run his own bike-repair shop. Jarod’s shop charges $65 for a repair, and last year the shop performed 3,000 repairs. Jarod’s production costs for the year included rent, wages, and equipment. Jarod spent $50,000 on rent and $100,000 on wages for his employees. Jarod keeps whatever profit the shop earns, but does not pay himself an official wage. Jarod borrowed $20,000 for the shop’s equipment at an annual interest rate of 5 percent. a. What is Jarod’s accounting profit? b. What is Jarod’s economic profit?

Accounting profit is also called the financial profit because it is derived after the subtraction of all dollar costs from total revenue.

The formula for accounting profit is Total revenue - Total cost

Accounting profit = (Price charge for repair × No. of repairs) - (Rent + wages)

Accounting profit = ($65 × 3,000) - ($50,000 + $100,000)

Accounting profit = $195,000 - $150,000

Accounting profit = $45,000

Economic profit is basically the profit from producing of goods and services.

The formula for the economic profit is Accounting profit - Opportunity cost

Economic profit = Accounting profit - Previous job earnings + Interest on equipment

Economic profit = $45,000 - ($60,000 + $20,000×5%)

Economic profit = $45,000 - $61,000

Economic profit = -$16,000

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