Refer to Scenario 7.1 below to answer the questions that follow.
SCENARIO 7.1: You are the owner and only employee of a company that writes computer software that is used by gamblers to collect sports data. Last year you earned a total revenue of $90,000. Your costs for equipment, rent, and supplies were $60,000. To start this business you invested an amount of your own capital that could pay you a return of $40,000 a year.
-Refer to Scenario 7.1. A yearly normal rate of return for your computer software firm would be
A) $20,000.
B) $40,000.
C) $60,000.
D) $100,000.

Question

Quizplus · Accepted Answer

The yearly normal rate of return for the computer software firm is the amount of profit earned after deducting all costs and a fair return on the owner's investment. The total cost of equipment, rent, and supplies was $60,000, and the owner invested an amount that could pay him a return of $40,000 a year. Therefore, the total cost is $100,000. The revenue earned was $90,000, which is less than the cost of $100,000, resulting in a loss of $10,000. To achieve a normal rate of return, the revenue must equal the cost, which means that the revenue needs to be $100,000. Hence, the yearly normal rate of return is $40,000, which is the fair return on the owner's investment.