Question

Entrepreneur's potential earnings as a salaried worker = $50,000

Annual lease on building = $22,000

Annual revenue from operations = $380,000 Payments to workers = $120,000

Utilities (electricity, water, disposal) costs = $8,000

Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000

Entrepreneur's forgone interest on personal funds used to finance the business = $6,000

Creamy Crisp's total revenues exceed its total costs, including a normal profit, by

A. $94,000

B. $80,000

C. $150,000

D. $230,000

Answer 1

The result shows an excess of $94,000, which is the economic profit over a normal profit. (option A)

Step-by-step explanation:

Creamy Crisp's total excess revenues over total costs, considering both explicit and implicit costs. To find this, we must first determine the accounting profit and then adjust for implicit costs.

Accounting profit: Subtract explicit costs (annual lease, payments to workers, utilities) from annual revenue:
Accounting profit = $380,000 (revenue) - ($22,000 + $120,000 + $8,000) = $230,000.

To find the economic profit, we must also subtract the implicit costs (potential earnings as a salaried worker, value of entrepreneur's talent in the next best activity, forgone interest on personal funds):
Implicit costs = $50,000 + $80,000 + $6,000 = $136,000.

Subtract the implicit costs from the accounting profit to find the excess:
Total excess = $230,000 - $136,000 = $94,000.

Therefore, the excess of Creamy Crisp's total revenues over its total costs, including a normal profit, is $94,000.