Scenario 14-1
As part of an estate settlement Mary received $1 million. She decided to use the money to purchase a small business in Anywhere, USA. If Mary would have invested the $1 million in a risk-free bond fund she could have made $100,000 each year. She also quit her job with Lucky.Com Inc. to devote all of her time to her new business; her salary at Lucky.Com Inc. was $75,000 per year.
-Refer to Scenario 14-1.How large would Mary's accounting profits need to be to allow her to attain zero economic profit?

Question

Quizplus · Accepted Answer

Mary's opportunity cost of using the $1 million to start her business is the $100,000 she could have earned annually from the risk-free bond fund, plus her previous salary of $75,000/year. So, her total opportunity cost is $175,000/year. In order to attain zero economic profit, Mary's accounting profits would need to equal her opportunity cost. Therefore, the accounting profits should be $175,000 per year (or higher). Choice C is the closest option to this value.

Scenario 14-1 As Part of an Estate Settlement Mary Received $1 Million