Final answer:
The accounting profit for Harvey's company, Extreme Gaming, is $220,000. This is calculated by subtracting the total explicit costs from the total revenue generated by selling 11,000 units of software. However, the economic profit would be lower at $165,000 when considering implicit costs such as his foregone salary and interest.
Step-by-step explanation:
To calculate the accounting profit for Harvey's company, Extreme Gaming, we must subtract the explicit costs from the total revenue generated in the first year. He sold 11,000 units at $75 each, generating a total revenue of:
$75 x 11,000 units = $825,000
The explicit costs per unit include production, packaging, marketing, employee wages, benefits, and rent, amounting to $55 per unit. So, the total explicit costs are:
$55 x 11,000 units = $605,000
Subtracting the total explicit costs from the total revenue gives us the accounting profit:
$825,000 - $605,000 = $220,000
However, this figure does not take into account the implicit costs such as Harvey's foregone salary of $45,000 and his foregone interest on the bonds of $10,000 (which is 10 percent of $100,000). To calculate the economic profit, we would subtract these implicit costs from the accounting profit.
Economic Profit = Accounting Profit - Implicit Costs
Economic Profit = $220,000 - ($45,000 + $10,000)
Economic Profit = $220,000 - $55,000
Economic Profit = $165,000
While the accounting profit is $220,000, the economic profit, which considers both explicit and implicit costs, would be $165,000.