problem about Accounting Profits
A construction manager earning $70,000 per year working for a regional home builder decided to open his own home building company. He took $100,000 out of one of his investment accounts that had been earning 6% a year and used that money to start up the business. He worked hard the first year, hiring one employee (his only salary cost for the business was the $40,000 paid to this employee), and generated total sales of $1,000,000. Total material and subcontracted labor costs for the year was $900,000.
a). What is his yearly accounting profit for the business?
b). What is the yearly economic profit for the business?
Accounting profit = Total revenue - Explicit costs
Accounting profit = 1,000,000 - (900,000 + 40,000) = 60,000
b) Economic profit is the difference between total revenue and total economic cost
Economic profit = Total revenue - Explicit costs - Implicit cost