Final answer:
Cost-Volume-Profit (CVP) analysis is a tool used in business to analyze the relationships between costs, volume, and profit. Operating income is the profit generated from the company's core operations before deducting interest and taxes. Economic profit takes into account both explicit and implicit costs.
Step-by-step explanation:
Cost-Volume-Profit (CVP) analysis is a tool used in business to analyze the relationships between costs, volume, and profit. It helps businesses determine how changes in sales volume, costs, and prices affect their profitability.
Operating income, or operating profit, is the profit generated from the company's core operations before deducting interest and taxes. It can be calculated by subtracting the explicit costs (such as fixed and variable costs) from the total revenues. For example, if the total revenues are $1,000,000 and the explicit costs are $600,000, $150,000, and $200,000 respectively, the operating income would be $50,000.
However, it is important to note that the economic profit takes into account both explicit and implicit costs. Implicit costs are the opportunity costs of using resources in a particular way. To calculate economic profit, subtract both explicit and implicit costs from the total revenues. Implicit costs could include things like the entrepreneur's own time or the rent paid for using owned property.
Thus, to calculate the economic profit, you would subtract the explicit costs ($600,000 + $150,000 + $200,000) and the implicit costs from the total revenues. Using the information given in the example, the economic profit would be $20,000 ($50,000 - $30,000).