Question

. Dolores used to work as a high school teacher for $40,000 per year but quit in order to start her own catering business. To buy the necessary equipment, she withdrew $20,000 from her savings, (which paid 3 percent interest) and borrowed $30,000 from her uncle, whom she pays 3 percent interest per year. Last year she paid $25,000 for ingredients and had revenue of $60,000. She asked Louis the accountant and Greg the economist to calculate her profit for her.

a)Louis says her profit is $34,100 and Greg says her profit is $6,500
b)Louis says her profit is $34,100 and Greg says she lost $6,500
c)Louis says her profit is $35,000 and Greg says she lost $5,000
d)Louis says her profit is $33,500 and Greg says her profit is $33,500

Answer 1

The correct option is B

Step-by-step explanation:

In order to compute the profit, the accountant consider the Explicit cost so,

Explicit Cost = Borrowed amount × Interest rate + Ingredients amount

= $30,000 × 3% + $25,000

= $259,000

Where Revenue is $60,000

Profit = Revenue - Explicit Cost

= $60,000 - $259,000

= $34,100

Economic Profit is computed as:

Economic Profit = Total Profit - Implicit Cost

= $34,100 - $40,600

= - $6,500

where

Implicit Cost = Salary + Interest

= $40,000 + ($20,000 × 3%)

= $40,000 + $600

= $40,600

Therefore, Louis says profit is $34,100 and Greg says she lost $6,500