Clancy lives in Miami and runs a business that sells pianos. In an average year,
ID: 1121490 • Letter: C
Question
Clancy lives in Miami and runs a business that sells pianos. In an average year, he receives $711,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $411,000; he also pays wages and utility bills totaling $279,000. He owns his showroom; if he chooses to rent it out, he will receive $1,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Clancy does not operate this piano business, he can work as a financial advisor, receive an annual salary of $31,000 with no additional monetary costs, and rent out his showroom at the $1,000 per year rate. No other costs are incurred in running this piano business.
Identify each of Clancy’s costs in the following table as either an implicit cost or an explicit cost of selling pianos.
Implicit Cost
Explicit Cost
Complete the following table by determining Clancy’s accounting and economic profit of his piano business.
Implicit Cost
Explicit Cost
The rental income Clancy could receive if he chose to rent out his showroom The wages and utility bills that Clancy pays The salary Clancy could earn if he worked as a financial advisor The wholesale cost for the pianos that Clancy pays the manufacturerExplanation / Answer
Accounting Profit = Revenue - explicit cost = $711,000 - $690,000 = $21,000
Economic Profit = Revenue - explicit cost - implicit cost = $711,000 - $690,000 - $32,000 = - $11,000 loss
Implicit cost is the notional cost which a business bears when it uses an asset which it owns. It is the opportunity cost that the business forgoes.
Explicit cost is the direct expense related to a business which is paid to others.
Explicit Cost The rental income Clancy could receive if he chose to rent out his showroom $ 1000 The wages and utility bills that Clancy pays $279,000 The salary Clancy could earn if he worked as a financial advisor $31,000 The wholesale cost for the pianos that Clancy pays the manufacturer $411,000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.