Final answer:
To calculate the cost of hiring a consultant for a business audit, tally explicit costs like office rentals and salaries, subtract these from revenue to find accounting profit, and consider implicit costs like forgone salary. A consultant's fee, often hourly, depends on their rates and the audit duration.
Step-by-step explanation:
To determine how much it costs to hire a consultant for a complete audit of business operations and finances, a two-step approach is typically used:
- Calculate the explicit costs associated with the business, which may include office rental, employee salaries, and other direct expenses. For example, if the office rental costs amount to $50,000 and a law clerk's salary is $35,000, the total explicit costs would be $85,000.
- Afterwards, subtract the explicit costs from the business revenue to find the accounting profit. If the revenues are $200,000, subtracting the explicit costs of $85,000 yields an accounting profit of $115,000.
However, these calculations only account for explicit costs. One must also consider implicit costs, such as the opportunity cost of the business owner quitting their current job. If the owner's annual salary at their current job is $125,000, this becomes an implicit cost of starting their own firm.
Regarding the cost of hiring a consultant, if a consultant charges $200 per hour, the total cost will depend on the number of hours required for the audit. Employing such a consultant makes economic sense if their hourly earnings from consulting exceed the benefits they would receive from alternative uses of their time, such as attempting to grow vegetables, which is not their area of expertise.