Question

Required information [The following information applies to the questions displayed below]:

Arndt, Inc. reported the following for 2021 and 2022 ($ in millions):
a. Expenses each year include $57 million of depreciation expense.
b. In 2022, Arndt sold equipment with a book value of $5 million at a gain of $1 million.
c. Arndt also issued bonds in 2022 and reported a loss of $2 million on early extinguishment of debt.
d. The company paid cash dividends of $10 million in 2021 and $12 million in 2022.

Answer 1

The firm's accounting profit is found by subtracting the explicit costs from its total revenues, which in this case is $50,000, calculated from $1 million in revenue minus $600,000 in labor, $150,000 in capital, and $200,000 in materials.

Step-by-step explanation:

To calculate a firm's accounting profit, we subtract the explicit costs from the total revenues. In this scenario, the firm had sales revenue of $1 million last year. The costs were as follows: $600,000 for labor, $150,000 for capital, and $200,000 for materials. The accounting profit is therefore calculated as $1,000,000 - ($600,000 + $150,000 + $200,000) which equals $50,000.

Accounting profit does not take into account implicit costs (also known as opportunity costs), which would be required to calculate economic profit. Therefore, the firm's accounting profit for the last year, considering only the explicit costs, is $50,000.