(Scenario: Accounting and Economic Profit) Use Scenario: Accounting and Economic Profit.
Scenario: Accounting and Economic Profit
Casey recently inherited $100,000 from her grandmother. Rather than invest the money in a mutual fund that earns 5% per year, she quit her job as a translator for the United Nations, which paid $60,000 per year, and started Casey's Coffee Crush, a small café in Tribeca. The location she rented cost $20,000 for the year. The equipment, café furniture, and coffee machines cost another $60,000. Staff, sales help, and advertising cost yet another $40,000. In her first year, her revenue was $150,000. Her accounting profit is:
A)$200,000.
B)$60,000.
C)$30,000.
D)$0.

Question

Quizplus · Accepted Answer

Casey's accounting profit can be calculated by subtracting her expenses from her revenue:

Revenue: $150,000 
Expenses: 
- Rent: $20,000 
- Equipment, furniture, and coffee machines: $60,000 
- Staff, sales help, and advertising: $40,000 
Total expenses: $120,000 
Accounting Profit: Revenue - Expenses = $150,000 - $120,000 = $30,000

Although Casey's café is earning a profit, it's important to note that she's not earning as much as she would if she had invested her inheritance in a mutual fund instead. Economic profit takes into consideration not just the explicit costs (like rent and equipment), but also the opportunity cost of the owner's time and the implicit costs of forgoing the next best alternative. In Casey's case, her economic profit would be negative because she's earning less than she would if she had stayed at her job as a translator and invested her inheritance in a mutual fund.