Question

The following is cost information for the Creamy Crisp Donut Company:
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Refer to the data. Creamy Crisp's total economic costs are_____?
(a) $186,000
(b) $286,000
(c) $386,000
(d) $460,000

Answer 1

Answer:

Given:

Annual lease = $22000

Annual revenue = $380000

Payments = $120000

Utilities = $8000

Value (entrepreneur's talent ) = $80000

Forgone Entrepreneur's interest = $6000

Therefore, we'll first compute the accounting profit using the following formula :

Accounting profit = Annual revenue - Annual lease - Payments - Utilities

Accounting profit = 380000 - 22000 - 120000 - 8000

Accounting profit =$230000

Therefore, the economics profit can be evaluated using the following formula:

Economic profit = Accounting profit - Opportunity cost (Salary of entrepreneur) - Value (entrepreneur's talent) - Forgone Entrepreneur's interest

= 230000 - 50000 - 80000 - 6000

= $94000