During a year of operation, Knight’s Electric, LLC collects $5,000,000 in revenue and spends $3,500,000 on labor expense, raw materials, rent, and utilities. Knight’s owner has provided $1,000,000 of her own money to her business instead of investing the money and earning a 12 percent annual rate of return.
-Knight's Electric earns accounting profit of $______________ and its economic profit is $______________.

Question

Quizplus · Accepted Answer

Accounting profit = Revenue - Business Expenses = $5,000,000 - $3,500,000 = $1,500,000
Economic profit = Accounting Profit - Opportunity cost
Opportunity cost = $1,000,000 at 12% annual rate of return = ($1,000,000 x 0.12) = $120,000
Economic profit = $1,500,000 - $120,000 = $1,380,000
Therefore, the accounting profit is $1,500,000 and the economic profit is $1,380,000. The best choice is D.

During a Year of Operation, Knight’s Electric, LLC Collects $5,000,000