(Scenario: Accounting and Economic Profit)Use Scenario: Accounting and Economic Profit.The implicit cost of capital for Wang's Wicker Furniture Store is: Scenario: Accounting and Economic Profit
Rather than put the $100,000 that his grandmother left him in a mutual fund that earns 5% each year,Tommy Wang quit his job,which paid $60,000 per year,and started Wang's Wicker Furniture Store.He rented a showroom for $20,000 for the year,purchased $60,000 in wicker furniture,and incurred costs of $40,000 for sales help and advertising.In his first year,his revenue was $150,000.

Question

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The implicit cost of capital is the opportunity cost of the capital used in the business. Since Tommy could have earned 5% on the $100,000 if he had invested it in a mutual fund, the implicit cost is 5% of $100,000, which is $5,000.