Last year, Reed's Financial Services received revenues of $500,000. Labor costs were $150,000, and equipment and building rental was $100,000. The owner Reed could be making $200,000 as a software engineer if he didn't operate the financial services firm. What is Reed's accounting profit?

Question

Quizplus · Accepted Answer

Accounting profit is calculated by subtracting the explicit costs from the total revenue. In this case, the explicit costs are labor ($150,000) and equipment/building rental ($100,000), totaling $250,000. Subtracting this from the total revenue of $500,000 gives an accounting profit of $250,000. The opportunity cost of Reed not working as a software engineer is not considered in accounting profit.

Last Year, Reed's Financial Services Received Revenues of $500,000