Question

Which of the following constitutes an implicit cost to the Johnston Manufacturing Company?

1) Wages paid to employees
2) Rent paid for the factory building
3) Interest paid on a loan
4) The opportunity cost of using company-owned land for another purpose

Answer 1

In the context of Johnston Manufacturing Company, the opportunity cost of using company-owned land for another purpose is an implicit cost.

Step-by-step explanation:

When discussing the costs that a business faces, we need to understand the difference between explicit costs and implicit costs. Explicit costs are out-of-pocket expenses for actual payments made, such as wages to employees or rent for a factory building. On the other hand, implicit costs represent the opportunity costs of utilizing resources that a company already owns, for which no actual payment is made.

In the context of Johnston Manufacturing Company, the opportunity cost of using company-owned land for another purpose is an example of an implicit cost. This cost reflects the fact that the company foregoes the potential income or benefits it could have received from using the land in a different manner, which could include renting it out to another business or using it for an alternative profitable project.