Question

The Lynx Manufacturing Company produces components used in electronic toys. In fiscal year 2017, Lynx earned an accounting profit of $3 million. However, Lynx's production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs. Which of the following statements is true?A) Lynx earned an economic profit of $5.5 million.

B) Lynx earned an economic profit of $500,000.
C) Lynx suffered an economic loss of $500,000.
D) Lynx suffered an economic loss of $2.5 million.

Answer 1

The correct answer is option B.

Step-by-step explanation:

In 2017, Lynx earned an accounting profit of $3 million.

Lynx's production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs.

The accounting profit involves only explicit costs. While economic profit includes both explicit as well as implicit cost.

Here, the implicit cost is the opportunity cost of producing toys components. Lynx could have earned greater profit if it produced components for mobile phone and also could have saved cost of production.

Economic profit

= accounting profit - implicit cost

= $3 million - ($2 million + $500,000)

= $3 million - $2.5 million

= $500,000

So, Lynx had an economic profit of $500,000.