Question

Creamy Crisps Worksheet Student: ___________________________________________________________________________  The following is cost information for the Creamy Crisp Donut Company:
Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000   1. Refer to the above data. Creamy Crisp's explicit costs are: 
  2. Refer to the above data. Creamy Crisp's implicit costs, including a normal profit, are: 
  3. Refer to the above data. Creamy Crisp's total economic costs are: 
  4. Refer to the above data. Creamy Crisp's accounting profit is: 
  5. Refer to the above data. Creamy Crisp's economic profit is: 
  6. Refer to the above data. Creamy Crisp's total revenues exceed its total costs, including a normal profit, by: 
  7. Refer to the above data. If, other things equal, Creamy Crisp's revenue fell to $286,000, how would this affect its profit?

Answer 1

Answer:

1) owner's salary        50,000

  lease on building   22,000

  wages                    120,000

 utilities                        8,000

 Total:                      200,000

2) owners salary 80,000

 capital interest    6,000

 total                   86,000

3) economic cost: 200,000 + 86,000 = 286,000

4) 380,000 - 200,000 = 180,000

5) 180,000 - 36,000 =  144,000

6) entrepreneur total profit: 230,000

7) if sales are 286,000 then:

accounting profit: 86,000

economic profit:   50,000

Explanation:

1) explicit cost: cost that involve cash disbursement in the future and accrual expenses

2) implicit cost: cost of the best alternative of each economic factor

3) economic cost: sum of both type of cost, explicit and implicit

4) accounting profit:

business revenue less explicit cost.

5) accounting profit less implicit cost:

notice the company is paying the entrepreneur with a salary thus, not all the opportunity cost will be used, only the difference:

50,000 - 80,000 = 30,000 salaries loss on the business.

plus 6,000 forgone interest: total 36,000

6) the normal profit to the entrepreneur is 180,000 from reamy Crisp's plus his 50,000 salary: 230,000

7) if sales are 286,000 then:

286,000 - 200,000 = 86,000 accounting profit

 86,000 -    36,000 = 50,000 economic gain