Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering business.To buy the necessary equipment,she withdrew $20,000 from her savings,(which paid 3 percent interest)and borrowed $30,000 from her uncle,whom she pays 3 percent interest per year.Last year she paid $25,000 for ingredients and had revenue of $60,000.She asked Louis the accountant and Greg the economist to calculate her profit for her.

Question

Quizplus · Accepted Answer

To calculate the profit, we need to take into account all the expenses and revenue.

Expenses:
- Equipment: $20,000 (one-time expense)
- Loan interest: 3% of $30,000 = $900
- Ingredient cost: $25,000

Total expenses: $45,900

Revenue: $60,000

Profit: Revenue - Expenses = $60,000 - $45,900 = $14,100

However, we need to also consider the opportunity cost of Dolores' salary as a teacher. She gave up a job that paid $40,000 per year to start her own business. Therefore, her total opportunity cost is:

Opportunity cost = $40,000 + ($40,000 x 3%) = $40,000 + $1,200 = $41,200

Profit after considering opportunity cost = Profit - Opportunity cost
= $14,100 - $41,200
= -$27,100 (negative means loss)

Therefore, Louis is incorrect and Greg is correct. Dolores had a loss of $27,100 in her catering business.

Dolores Used to Work as a High School Teacher for $40,000