$21,000 $4,000 If the owner of the drugstore hired a manager for $10 an hour to

Question

$21,000

$4,000

If the owner of the drugstore hired a manager for $10 an hour to take his place, how much of a change would show up in:

Instructions: Enter your responses as a whole number. Indicate a negative response with a (-) negative sign.

(a) Accounting profits per month?

$

(b) Economic profits per month?

$

Total (gross) revenues per month $ 27,000 less explicit costs:   Cost of merchandise sold $17,000   Wages to cashier, stock, and delivery help 2,500    Rent and utilities 800    Taxes 700        Total explicit costs

$21,000

Accounting profit (revenue minus explicit costs) $6,000 less implicit costs:    Wages of owner-manager, 300 hours @ $10 per hour $3,000    Return on inventory, 10% per year on $120,000 1,000        Total implicit costs

$4,000

Economic profit (revenue minus all costs) $2,000

Explanation / Answer

a)

From the table given, Total (gross) revenues per month is $27,000 and Total explicit cost is $21,000. As we know, Accounting profit is difference between revenue and explicit costs of doing business, such as operating expenses, depreciation, interest and taxes.

So, Accounting Cost per month = $27,000 - $21,000 = $6,000

b)

Economic profit is the difference between total monetary revenue and total costs including both explicit and implicit costs.

So, Economic profit per month = $27,000 - $21,000 - $4,000 = $2,000

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