The following is cost information for the Creamy Crisp Donut Company.
-Entrepreneur's potential earnings as a salaried worker = $50,000
-Annual lease on building = $22,000
-Annual revenue from operations = $380,000
-Payments to workers = $120,000
-Utilities (electricity, water, disposal) costs = $8,000
-Value of Entrepreneur's talent in the next best entrepreneurial activity = $80,0000
-Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Required:
Refer to the data to calculate Creamy Crisp's accounting profit and economic profit.

$230,000 and $94,000

Explanation:

The computation is shown below:

For accounting profit

= Total revenue - explicit cost

where,

Total revenue is $380,000

And, the explicit cost is

= Utilities + payment to workers + annual lease on building

= $8,000 + $120,000 + $22,000

= $150,000

So, the accounting profit is

= $380,000 - $150,000

= $230,000

And, the economic profit is

= Total revenue - explicit cost - implicit cost

where,

total revenue is $380,000

Explicit cost is $150,000

And, the implicit cost is

= Value of Entrepreneur's talent in the next best entrepreneurial activity + Entrepreneur's potential earnings as a salaried worker + Entrepreneur's forgone interest on personal funds used to finance the business

= $80,000 + $50,000 + $6,000

= $136,000

So, the economic profit is

= $380,000 - $150,000 - $136,000

= $94,000

The implicit cost is a type of opportunity cost which can be held for some specific purpose while the explicit cost is the out of pocket cost or the expenses incurred by the firm

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