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 $5,000 in saving 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 $12,000 in rent, $1,000 in office supplies, $20,000 for office staff, and $4,000 in telephone expenses. What are your total explicit cost and total implicit costs?

Answer 1

The total explicit cost and total implicit costs is $37,000 and $40,250 respectively.

Step-by-step explanation:

Explicit cost : The explicit cost is that cost which is paid for day to day activities. Like : salaries expense, wages expense, rent, telephone expense, etc.

Implicit cost : The implicit cost is that cost which is related to the firm's growth. or it can be opportunity cost also.

So,

Total Explicit cost = Rent expense + Office supplies + Office staff + Telephone expense

= $12,000 + $1,000 + $ 20,000 + $ 4,000

= $37,000

And Total Implicit cost = Starting Salary + Savings

= $40,000 + $5,000 × 5%

= $40,250

Hence, the total explicit cost and total implicit costs is $37,000 and $40,250 respectively.