(Scenario: Accounting and Economic Profit)Use Scenario: Accounting and Economic Profit.The economic profit of 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

Quizplus · Accepted Answer

Economic profit is calculated by subtracting both explicit and implicit costs from total revenue. Here, explicit costs include the $60,000 for furniture, $20,000 for showroom rent, and $40,000 for sales help and advertising, totaling $120,000. Implicit costs include the $5,000 opportunity cost of not investing the $100,000 (5% of $100,000) and the $60,000 salary foregone by quitting his job, totaling $65,000. Therefore, the economic profit is $150,000 (revenue) - $120,000 (explicit costs) - $65,000 (implicit costs) = -$35,000.