Nicole owns a small pottery factory. She can make 1,000 pieces of pottery per year and sell them for €100 each. It costs Nicole €20,000 for the raw materials to produce the 1,000 pieces of pottery. She has invested €100,000 in her factory and equipment: €50,000 from her savings and €50,000 borrowed at 10 per cent. (Assume that she could have loaned her money out at 10 per cent, too.) Nicole can work at a competing pottery factory for €40,000 per year. The accounting profit at Nicole's pottery factory is

Question

Quizplus · Accepted Answer

The accounting profit is calculated as total revenue minus explicit costs. Nicole's total revenue is €100,000 (1,000 pieces x €100 each). Her explicit costs include €20,000 for raw materials and €5,000 interest on the borrowed €50,000. Thus, the accounting profit is €100,000 - €25,000 = €75,000.

Nicole Owns a Small Pottery Factory