Question

Brian lives in Chicago and runs a business that sells pianos. In an average year, he receives $793,000 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 Brian 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 Brian's costs in the following table as either an implicit cost or an explicit cost of selling pianos.
Implicit Cost Explicit Cost
The wages and utility bills that Brian pays
The rental income Brian could receive if he chose to rent out his showroom
The salary Brian could earn if he worked as a financial advisor
The wholesale cost for the pianos that Brian pays the manufacturer
Complete the following table by determining Brian's accounting and economic profit of his piano business.
Profit
(Dollars)
Accounting Profit
Economic Profit

Answer 1

Brian

1. Implicit and Explicit Costs:

Implicit costs:

The rental income Brian could receive if he chose to rent out his showroom

The salary Brian could earn if he worked as a financial advisor

Explicit costs:

The wages and utility bills that Brian pays

The wholesale cost for the pianos that Brian pays the manufacturer

2. Brian's accounting and economic profit of his piano business:

Accounting profit = $62,000

Economic profit (loss) = ($3,000)

Step-by-step explanation:

a) Data and Calculations:

Accounting Profit Economic Profit

Sales Revenue $793,000 $793,000

Cost of pianos 430,000 430,000

Wages and utility bills 301,000 301,000

Implicit (Opportunity) Costs:

Rent 15,000

Salary as an accountant 50,000

Total costs 731,000 796,000

Profit (loss) $62,000 ($3,000)

b) Implicit costs are opportunity costs. They include the costs that arise from forgone benefits when another opportunity is taken instead of the other. Explicit costs are costs that are actually incurred by taking an opportunity.