Question

The Lynx Manufacturing Company produces components used in electronic toys. In fiscal year 2017, Lynx earned an accounting profit of $3 million. However, Lynx's production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs. Which of the following statements is true?a) lynx earned an economic profit of $5.5 million. b) lynx earned an economic profit of $500,000.c) lynx suffered an economic loss of $500,000.d) lynx suffered an economic loss of $2.5 million.

Answer 1

B) lynx earned an economic profit of $500,000.

Step-by-step explanation:

economic profit/loss = accounting profit - opportunity costs

economic profit = $3,000,000 - ($2,000,000 + $500,000) = $3,000,000 - $2,500,000 = $500,000

Opportunity costs are defined as the extra costs (or lost benefits) resulting from choosing one activity (or investment) over another alternative.

Answer 2

B) lynx earned an economic profit of $500,000

Step-by-step explanation:

Economic profit is the difference between revenue received and the cost of inputs used and any opportunity cost.

Economic profit = total income - total expense - opportunity cost

Given that

Total income = 3 million

Total expenses = 500000

Opportunity cost = 2million

Economic profit = 3000000 - 500000 - 2000000

Economic profit = 500,000

Therefore, lynx earned economic profit of $500,000