After graduation, you face a choice. One option is to work for a multinational c

Question

After graduation, you face a choice. One option is to work for a multinational consulting firm and earn a starting salary (benefits included) of $40,000. The other option is to use $6,000 in savings to start your own consulting firm. You could earn an interest return of 5 percent on your savings. You choose to start your own consulting firm. At the end of the first year, you add up all of your expenses and revenues. Your total includes $9,000 in rent, $850 in office supplies, $18,000 for office staff, and $3,500 in telephone expenses. Your explicit costs are S Your implicit costs are $

Explanation / Answer

Explicit cost refers to the expenses paid to outsiders for availing productive services from them to run the business.

Rent, office supplies, salary paid to office staff, and telephone expenses are all explicit cost.

Calculate the total explicit cost -

Explicit cost = Rent + Office supplies + Office staff + Telephone expenses

Explicit cost = $9,000 + $850 + $18,000 + $3,500

Explicit cost = $31,350

Thus,

The explicit costs are $31,350

Implicit costs refers to the imputed value of productive services that are supplied by the owners of the business.

In given case, owner is supplying his own capital and labor.

So, salary foregone and interest foregone are the implicit cost.

Salary foregone = $40,000

Interest foregone = $6,000 * 0.05 = $300

Calculate the total implicit cost -

Total implicit cost = Salary foregone + Interest foregone = $40,000 + $300 = $40,300

Thus,

The implicit costs are $40,300.

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