Economics; The Cost of Production

posted by .

Please check my answers if they are correct. Thank you.

THE QUESTION:
Mark runs a business that sells guitars. In an average year, he receives $900 000 from sales of guitars. Of the sales revenue, he must pay the manufacturer a wholesale cost of $600 000; he also pays wages and utility bills totalling $200 000. If he does not operate this guitar business, he can work in another business and receive an annual salary of $65 000. He owns his showroom; if he chooses to rent it out, he will receive $40 000 in rent per year. Assume that the value of this showroom does not depreciate over the year. No other costs are incurred in running this guitar business.

i. What are Mark’s explicit costs of selling guitars? Select all that apply.

a) The salary Mark could earn if he worked in another business
b) The wages and utility bills that Mark pays
c) The wholesale cost for the guitars that Mark pays the manufacturer
d) The rental income Mark could receive per year if he chose to rent his showroom out

ii. What is the accounting profit of Mark’s guitar business?

iii. What is the economic profit of Mark’s guitar business?

iv. Taking into accounting Mark’s implicit costs of doing business as well as his explicit costs, if Mark’s only goal is to earn as much economic profit as possible, he ________ (should or should not) continue to stay in the guitar business.

-------------------

MY ANSWER:
i. a, b
ii. $900 000
iii. $100 00
iv. He should continue because he is not losing any profits.

  • Economics; The Cost of Production -

    First, I am a little concerned about the word, "explicit." I assume that explicit costs are those costs with an actual dollar outlay. (e.g., accounting costs). Further, I will assume that costs that are not explicit (i.e., implicit costs) are the opportunity costs of running the business.
    That said, I disagree with all of your answers:

    i) the explicit costs are b and c, the wholesale costs of the guitars and the wages and utility bills.
    ii) Accounting profits are the 900,000 sales less the explict costs of 600,000 and 200,000 = $100,000
    iii) The economic profit would also subtract out Mark's opportunity costs of running the business; the lost salary of 65,000 and the lost rent of 40,000. Economic profit is -$5,000
    iv) Mark should quit the guitar business and take the salary of 65,000 and the rent of 40,000 and

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. finance and cost management

    Diazstar corporation sells on terms of 2/10, n/30. 70% of costumers normally avail of the discounts. annual sales are $900,000. 80% of which is made on credit. Cost is approximately 75% of sales. required: 1. average balance in accounts …
  2. Calculus

    Carla Music Company estimates that the marginal cost of manufacturing its professional series guitar is C’ (x) = .002x + 100 dollars/month when the level of production is x guitars/month. The fixed costs by Carla are $4000 per month. …
  3. college-Finance

    any help? thank you Diazstar corporation sells on terms of 2/10, n/30. 70% of costumers normally avail of the discounts. annual sales are $900,000. 80% of which is made on credit. Cost is approximately 75% of sales. required: 1. average
  4. MircroEconomics - Production & Cost

    Please check my answers if they are correct! If not, please make corrections. Thank you! Bob, owner of Bob’s Auto, sells cars. The number of car sales is represented by y. Bob buys autos at a price of A each and has no other costs. …
  5. business math

    Please help me to solve the question below. An electrical appliances shop owner estimates that his sales will increase by 5% every month. The sales for the first month were $30,000. Find: a)The sales for the 10th month b)the total …
  6. Economics

    Jim left his previous job as a sales manager and started his own sales consulting business. He previously earned $70,000 per year, but he now pays himself $25,000 per year while he is building the new business. What is the economic …
  7. business and finance

    Use this information to calculate the following: Sales returns $ 700 Rent expense 1,288 Sales discounts 950 Depreciation expense 600 Cost of merchandise sold 7,600 Gross sales 20,900 Advertising expense 1,650 Salary expense 2,900 Heat …
  8. Microeconomics

    4a. In the market for hand-made guitars, when the price of guitars is $800, annual revenues are $640,000. When the price falls to $700, annual revenues decline to $630,000. Over this range of guitar prices, is the demand for hand-made …
  9. Math

    Carlota Music Company estimates that the marginal cost of manufacturing its Professional Services guitars in dollars/month by the following. This model assumes that the level of production is x guitars/month. C '(x) = 0.007x + 130 …
  10. accounting II

    i am completely stuck on this! 5. Manufacturing statements and cost behavior Tampa Foundry began operations during the current year, manufacturing various products for industrial use. One such product is light-gauge aluminum, which …

More Similar Questions