Clancy lives in Miami and runs a business that sells pianos. In an average year,
ID: 1121803 • 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 = Total Revenue - Explicit costs
= 711,000 - (411,000 + 279,000 )
= $21,000
Economic profit = Total Revenue - Explicit costs - Implicit costs
= 711,000 - (411,000 + 279,000 ) - (1,000 + 31,000)
= -$11,000
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