Question

sarah's sewing services (sss) has been in operation for more than 20 years. ten years ago, planning for future growth of its manufacturing facilities, sss purchased a plot of land in an industrial area for $100,000. during the last couple of years, sss has not met expectations. business has fallen slightly and cash flows are tight. due to the decrease in service demand, management does not believe that sss will use this plot of land in the near future. as a result, during the taxation year ended march 31, 2022, sss sold this land for $500,000. $150,000 was received in february, 2022, with the remainder to be paid in two equal instalments in february, 2023 and february, have been advised that capital gains treatment is appropriate for this can claim a reserve on the above sale at march 31, 2022 of:

Answer 1

To calculate the economic profit, subtract both explicit and implicit costs from total revenue. In this case, the implicit cost is the $30,000 of foregone rental income for the land. With this deduction, the economic profit can be found for the firm's last year of operation.

Step-by-step explanation:

The calculation of economic profit requires taking into account both explicit and implicit costs. In the scenario provided, where a factory sits on land owned by the firm that could be rented for $30,000 per year, the implicit cost of not renting the land (known as opportunity cost) must be considered in the calculation of economic profit. Assuming the firm has accounted for all other costs and revenues, to calculate economic profit, we subtract both the explicit costs (operational costs, wages, etc.) and the implicit costs ($30,000 of foregone rental income) from the total revenue.

Example Calculation:

Let's say the total revenue reported by the firm last year was $200,000, and the explicit costs (including salaries, materials, and other operational expenses) amounted to $100,000. The economic profit would be:

Total Revenue: $200,000

Minus Explicit Costs: $100,000

Minus Implicit Costs (Opportunity Cost of Land): $30,000

The economic profit would thus be:

• $200,000 - $100,000 - $30,000 = $70,000