Suppose a company incurs the following costs: labor, $600;equipment, $200; and m

Question

Suppose a company incurs the following costs: labor, $600;equipment, $200; and materials, $100. The company owns the building, so it doesn't have to pa theusual $800 in rent. a) What is the total accounting cost? b)What is the total economic cost? c)How would accounting and economic costs change if thecompany sold the building and then leased it back? Suppose a company incurs the following costs: labor, $600;equipment, $200; and materials, $100. The company owns the building, so it doesn't have to pa theusual $800 in rent. a) What is the total accounting cost? b)What is the total economic cost? c)How would accounting and economic costs change if thecompany sold the building and then leased it back?

Explanation / Answer

Suppose a company incurs the following costs: labor, $600;equipment, $200; and materials, $100. The company owns the building, so it doesn't have to pa the usual$800 in rent. a) What is the total accounting cost? Account Cost =Labor + Equipment + Material = $600 + $200 +$100 =$900
b)What is the total economic cost?
Economic Cost = The economiccost of a decision depends on both the cost of thealternative chosen and the benefit that the best alternative wouldhave provided if chosen. Economic cost differs from accountingcost because it includes opportunitycost.

Economic Cost = $900 + ($800)=$1700
Instead of producing units, thecompany could rent the building for $800
c)How would accounting and economic costs change if the companysold the building and then leased it back?
The accounting cost would increase by $800 while the economic costwould be whether to use the building for something else Suppose a company incurs the following costs: labor, $600;equipment, $200; and materials, $100. The company owns the building, so it doesn't have to pa the usual$800 in rent. a) What is the total accounting cost? Account Cost =Labor + Equipment + Material = $600 + $200 +$100 =$900
b)What is the total economic cost?
Economic Cost = The economiccost of a decision depends on both the cost of thealternative chosen and the benefit that the best alternative wouldhave provided if chosen. Economic cost differs from accountingcost because it includes opportunitycost.

Economic Cost = $900 + ($800)=$1700
Instead of producing units, thecompany could rent the building for $800
c)How would accounting and economic costs change if the companysold the building and then leased it back?
The accounting cost would increase by $800 while the economic costwould be whether to use the building for something else

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