Question

Barney decides to quit his job as a corporate accountant, which pays $12,000 a month, and goes into business for himself as a certified public accountant. He runs his business from his converted garage apartment, which he could rent out for \$315 a month if he wasn't using it as a home office. He must purchase office supplies worth $85 a month, and his monthly electricity bill has increased by $40 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $17,000 per month.

Answer 1

Barney's CPA business has a monthly accounting profit of $16,875 after subtracting explicit costs from revenue and a monthly economic profit of $4,560 after accounting for implicit costs such as foregone salary and lost rental income.

Step-by-step explanation:

To determine if Barney's decision to quit his job as a corporate accountant and start his own CPA business was financially sound, we must consider both accounting profit and economic profit.

Calculating Accounting Profit

Barney's monthly revenue from his CPA business is $17,000.
Explicit costs include:
Office supplies: $85
Additional electricity bill: $40
Total monthly explicit costs: $125 ($85 + $40)

Monthly Accounting Profit:

Revenue - Explicit Costs = Monthly Accounting Profit
$17,000 - $125 = $16,875 (Monthly Accounting Profit)

Calculating Implicit Costs

Implicit costs are opportunity costs that are not directly paid but represent lost opportunities. For Barney, these are:
Foregone salary from previous job: $12,000
Lost rental income for the garage: $315
Total monthly implicit costs: $12,315

Monthly Economic Profit:

Accounting Profit - Implicit Costs = Economic Profit
$16,875 - $12,315 = $4,560 (Monthly Economic Profit)

Although Barney's economic profit is positive, it is important to remember that whether or not his CPA business is economically successful also depends on factors beyond just profit, such as personal satisfaction, work-life balance, and long-term business viability.