Question

Gomez runs a small pottery firm. He hires one helper at $16,500 per year, pays annual rent of $6,000 for his shop, and spends $22,500 per year on materials. He has $40,000 of his own funds invested in equipment (pottery wheels, kilns, and so forth) that could earn him $5,000 per year if alternatively invested. He has been offered $19,500 per year to work as a potter for a competitor. He estimates he could use his talents to earn an additional $5,500 per year in consulting fees if he were working full time as a potter. Total annual revenue from pottery sales is $89,000.Calculate the accounting profit and the economic profit for Gomez's pottery firm.

Accounting profit = ?
Economic profit = ?

Answer 1

$44,000

$14,000

Step-by-step explanation:

Accounting profit is total revenue less total explicit cost.

Accounting profit = Revenue - Explicit cost

Total explicit cost = $16,500 + $6,000 + $22,500 = $45,000

Total revenue = $89,000

Accounting profit = $89,000 - $45,000 = $44,000

Economic profit is accounting profit less implicit cost or opportunity cost.

Opportunity cost is the cost of the next best option forgone when one alternative is chosen over other alternatives.

Opportunity cost = $5,500 + $19,500 + $5,000 = $30,000

Economic profit = $44,000 - $30,000 = $14,000

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