this is the second time I am posting the question. please help me with right ans
ID: 1113255 • Letter: T
Question
this is the second time I am posting the question. please help me with right answer
John Jones owns and manages a café in Collegetown whose annual revenue is $5,000. Annual expenses are as follows: ifé and is willing to pay $275 pery Expense Amount $2,0 bor ood and drink Electrici hicle lease ent nterest on loan for equipment l but instead had invested $10,000 1,000! a) Suppose John could earn $1,100 per year as a recycler of aluminum cans. However, he prefers iun he profit? café and is willing to pay $275 per year to run the café rather than to recycle. Is the café making an economic B o. the café is making an economic loss Bof -350 0 per year. No Should John stay in the café business? No, he should not stay in the café business. b) Suppose John had not had to get a $10,000 loan at an annual interest rate of 10 percent to buy equipment, but instead had invested $10,000 of his own money in equipment. Calculate John's annual accounting profit $ -10,750 c) Suppose John could earn $1,000 a year as a recycler, and the likes recycling just as well as runni How much additional revenue would the café have to collect each year to earn a normal p why run rofit? $ 250Explanation / Answer
a)
Additional implicit cost = $1,000 + $275 = $1,275
Subtracting this implicit cost from accounting profit gives us an Economic loss of $(1,275 - 750) = $525.
If John goes by accounting profit only, he will stay in cafe business, but going by economic profit, he will not (since there is an economic loss).
b)
Accounting profit = Revenue - all expenses
= $5,000 - $(2,000 + 500 + 100 + 150 + 500 + 1,000) = $5,000 - $4,250
= $750
c)
This option will reduce $275 of economic (implicit) cost. Revised implicit cost = $1,000.
Revised economic profit = Accounting profit - $1,000 = $750 - $1,000 = - $250 (Loss)
So, revenue has to increase by $250 to cover this loss and make a normal profit.
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