Question

Mike starts his own business after quitting his job in which he made​ $75,000. Expenses include​ $100,000 for wages and​ salaries, which includes a wage for the owner of​ $75,000, utilities of​ $5000, equipment of​ $50,000, and materials of​ $40,000. If revenues are​ $200,000, his accounting and economic profits are respectively:

Answer 1

Accounting Profits = $130,000

Economic profit = $5,000

Step-by-step explanation:

Data provided in the question:

Previous wage = $75,000

Expenses for wages and​ salaries = $100,000

Wage for the owner =​ $75,000

Utilities =​ $5000

Equipment charges = ​ $50,000

Materials =​ $40,000

Revenues =​ $200,000

Now,

Since he is himself the owner his salary will not be included in the wages expense

Thus,

Net expense for salary = $100,000 - $75,000

= $25,000

Accounting Profits = Revenues - Net expense for salary - Utilities - Materials

= $200,000 - $25,000 - $5,000 - $40,000

= $130,000

Economic profit = Accounting Profits - Equipment charges - Previous wage

= $130,000 - $50,000 - $75,000

= $5,000