Suppose you are earning $22,000 a year working as a sales representative for a T

Question

Suppose you are earning $22,000 a year working as a sales representative for a T- shirt manufacturer. At some point you decide to open a retail store of your own to sell T-shirts. You invest $20,000 of savings that has been earning an interest income of $1000 per year. You decide that your new firm will occupy a small store that you currently own and have been renting out for $5000 per year. A year after you open the store you total up your accounts and find the following: Total sales revenue $120,000 Cost of T-shirts $40,000 Clerk's salary 18,000 Utilities (bills from hydro, internet, etc.) 5,000 What are the total explicit costs? What are the total implicit costs? According to an Accountant, what is your annual profit? What is your annual economic profit?

Explanation / Answer

a. Explicit cost = Cost of T-shirts + Clerk's salary + Utilities = $ 40,000 + $ 18,000 + $ 5,000 = $ 63,000

b. Implicit cost is the cost which we sacrificed for opening the store = $ 22,000 + $ 1,000 + $ 5,000 = $ 28,000

c. Accounting profit = Total revenue - Total cost = $ 120,000 - ($ 40,000 + $ 18,000 + $ 5,000)

= $ 120,000 - $ 63,000 = $ 57,000

d. Economic profit = Accounting profit - Implicit cost = $ 57,000 - $ 28,000 = $ 29,000

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