Question

Tim lives in Houston and runs a business that sells pianos. In an average year, he receives $793,000 in revenue from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $430,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $15,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Tim does not operate this piano business, he can work as a financial advisor and receive an annual salary of $50,000 with no additional monetary costs. No other costs are incurred in running this piano business. Identify each of Darnell's costs in following as either an implicit cost or an explicit cost of selling pianos.The wholesale cost for the pianos that Darnell pays the manufacturer The salary Darnell could earn if he worked as an accountant The wages and utility bills that Darnell pays The rental income Darnell could receive if he chose to rent out his showroom

Answer 1

Answer: The explicit costs of selling pianos are:

1) Wholesale manufacturing costs of $430,000

2) Wages and utility Bills of 301,00

The implicit costs of selling pianos are:

1) $15000 rent per year

2) $50,000 annual salary.

Explanation: Implicit costs are the opportunity costs of doing a business or the profits that the owner decides to give up because of doing business.

In this case the implicit costs are the rent he would receive on the showroom instead of selling pianos there and the salary he could earn as an divisor instead of selling pianos. These are the opportunities that he has to forgo in order to do the piano business.

Explicit costs are costs which are directly related tot the business therefore they include the manufacturing cost and wages and utility bills as they are directly related to the business.