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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. Instead of using the capital for his own business, he could rent it to a rival firm and earn $5,000 a year. In his first year, his revenue was $150,000.
-(Scenario: Accounting and Economic Profit) Look at the scenario Accounting and Economic Profit. The economic profit of Wang's Wicker Furniture Store is:

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Economic profit considers both explicit and implicit costs. Explicit costs are $20,000 (rent) + $60,000 (furniture) + $40,000 (sales help and advertising) = $120,000. Implicit costs include the foregone salary of $60,000 and the foregone interest of $5,000. Total costs = $120,000 + $60,000 + $5,000 = $185,000. Revenue is $150,000. Economic profit = $150,000 - $185,000 = -$35,000.

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