Consider an individual who has an MBA degree and is considering investing $200,0
ID: 1232916 • Letter: C
Question
Consider an individual who has an MBA degree and is considering investing $200,000 in a retail store that she would manage. The projected income (revenue) for the year as prepared by an accountant is $90,000. The cost of goods sold is $40,000. There is advertising cost of $10,000, depreciation of $10,000, utilities cost of $3,000, property tax for the business of $2,000, and miscellaneous business expenses of $5,000. On the $200,000 that the owner has invested in the business, the best alternative use of that money is a bank account paying a 5% interest rate for the year. Finally, the owner could have earned $60,000 in salary working for someone else with her MBA degree. What are the values of accounting and economic profit from investing in the retail store?
Explanation / Answer
Accounting profit is (90,000- 40,000-10,000-10,000-3,000-2,000-5,000)= 20,000 Economic profit is accounting profit minus opportunity costs. Opportunity costs are 60,000 in foregone earnings and 200,000*.05= 10,000 foregone interest. Economic loss is 20,000-60,000- 10,000= 50,000.