Final answer:
To find a business's profit, subtract the explicit costs from total revenues. An accounting profit is calculated as the difference between the total revenue and the total explicit costs.
Step-by-step explanation:
The amount of profit or loss earned by a business can indeed be determined by subtracting the firm's expenses (also known as explicit costs) from its revenues. To put this into formula terms:
Profit = Total Revenue - Total Cost
For example, suppose a firm has revenues of $200,000 and explicit costs of $85,000. The calculation for the accounting profit would be as follows:
- Revenues: $200,000
- Explicit Costs: -$85,000
- Accounting Profit: $115,000
In another scenario, if total revenues are $1,000,000 and the explicit costs are the sum of $600,000, $150,000, and $200,000, the firm's accounting profit would be:
Accounting Profit = $1,000,000 - ($600,000 + $150,000 + $200,000) = $50,000