Question

After graduation, you face a choice. You can work for a multinational consulting firm and earn a starting salary (including benefits) of $40,000, or you can start your own consulting firm using $5,000 of your own savings. If you keep your money in a savings account, you can earn an interest rate of 7 percent. You choose to start your own consulting firm. At the end of the first year, you add up all of your expenses and revenues. Your expenses include $14,000 for rent, $1,000 for office supplies, $24,000 for labor, and $4,500 for telephone expenses. After operating your consulting firm for a year, your total revenues are $88,000.

Required:
What are your total explicit cost and total implicit costs?

Answer 1

Step-by-step explanation:

Money is used to cover the explicit cost. They're what we're used to seeing, and they're easy to identify. There are several classifications for explicit costs; we can distinguish between fixed and variable costs, as well as direct and indirect costs. Raw materials, manpower, indirect production costs, and so on are all factors that contribute to its expense.

The opportunity cost of using a resource is the amount of money paying for it that might have been used on something else.

Alternative benefit options or money that we miss earning by doing such business acts are referred to as opportunity costs.

When a corporation foregoes an alternative action but does not make a bill, it incurs implicit costs. These are a company's hidden costs:

1. The use of the firm's own funds (money or assets).

2. The owner's capital, savings, and financial services are used.

From the given information:

The total explicit cost = Rent + office supplies + office staff + telephone expense

=$( 14000 + 1000 + 24000 + 4500)

= $43500

The total implicit cost = forgone salary + forgone interest

= $40000 + 7% of $5000

= $40000 + 350

=$40350