Final answer:
Companies consider both accounting profit and economic profit when using the direct write-off method. Accounting profit is the actual cash flow, while economic profit includes opportunity costs. Properly understanding these profits is crucial for assessing a company's economic success.
Step-by-step explanation:
The question seems to concern the comparison between two concepts that companies weigh when using the direct write-off method for accounting. The first concept is accounting profit, which is the difference between the total revenue and the explicit costs—the actual cash flow in and out of the business. Accounting profit is important as it determines the income taxes a business needs to pay. The second concept is economic profit, which includes both explicit and implicit costs. Economic profit takes into account not only the cash transactions but also the opportunity costs of resources utilized by the firm.
To calculate accounting profit, one would subtract explicit costs from the total revenue. For example, if a company has revenues of $200,000 and explicit costs of $85,000, the accounting profit would be $115,000. Economic profit requires a further step of subtracting implicit costs from the accounting profit to determine the true economic gain or loss of the company. Understanding the distinction between these two types of profit helps a company in assessing its true economic success, thereby influencing its long-term decision-making strategies.