Question

On November 29, a sales agreement was signed between Modern and a large national retail chain; Modern agreed to sell $50,000 of furniture per month over the next three years, commencing March 1 the following year. Modern received a bonus of $75,000 as per the agreement at the time of signing the sales agreement, which I recorded as revenue. Modern is required to fulfil the contract requirements by ensuring an adequate supply of product for the $50,000 monthly purchase. Lisa was anxious to see the bonus in revenue for the year-end financial statements.

Answer 1

The firm's accounting profit is calculated by subtracting total explicit costs from the sales revenue. The firm had $1 million in sales revenue and $950,000 in total costs, resulting in an accounting profit of $50,000.

Step-by-step explanation:

The question concerns how to calculate a firm's accounting profit, which is a fundamental concept in business and finance. To determine the accounting profit, we subtract the total explicit costs (labor, capital, materials) from the sales revenue. In the provided case, the firm had sales revenue of $1 million and incurred $600,000 on labor, $150,000 on capital, and $200,000 on materials. Therefore, the accounting profit is calculated as follows:

Sales revenue - (Labor costs + Capital costs + Materials costs) = Accounting profit

$1,000,000 - ($600,000 + $150,000 + $200,000) = $1,000,000 - $950,000 = $50,000

The firm's accounting profit for the year would have been $50,000.