Hi. THis is due Tuesday. I am working on it but can use some help. Peggy-Sue has been offered a job by Cookie monster inc for a salary of $125,000 per year. Currently she is producing her own cookies and she has revenues of $260,000 per year. Her costs are $40,000 for labor, $10,000 for rent, $35,000 for ingredients, and $5000 for utilities. She has $100,000 of her own money invested in the operation, which, if she leaves, can be sold for $40,000 that she can invest at 10% per year.
A)Calculate her accounting and economic profits.
B)Advise her as to what she should do.
Thanks in advance.
Take a shot. Calculate her accounting and economic profits. With that, you will easily be able to advise her.
What I was wondering was whether I should add her $100,000 investment as an expense when calculating her accounting profit. My Text book says its an implicit cost but wouldn't it be an explicit cost as well?
Thank you
Peggy-Sue’s cookies are the best in the world, or so I hear. She has been offered a job by Cookie Monster, Inc., to come to work at $125,000 per year. Currently, she is producing her own cookies, and she has revenues of $250,000 per year. Her costs are $50,000 for labor, $15,000 for rent, $70,000 for ingredients, and $6,000 for utilities. She has $100,000 of her own money invested in the operation, which, if she leaves, can be sold for $30,000 that she can invest at 45 percent per year.
When calculating accounting profit, we consider explicit costs, which are actual out-of-pocket expenses. Implicit costs, on the other hand, are the opportunity costs of using resources that the business already owns. In this case, the $100,000 investment is an implicit cost because it represents the opportunity cost of using that money elsewhere (e.g., investing it at 10% per year).
To calculate Peggy-Sue's accounting profit, we subtract her total explicit costs from her revenues:
Revenues:
$260,000
Explicit costs:
Labor: $40,000
Rent: $10,000
Ingredients: $35,000
Utilities: $5,000
Total explicit costs:
$40,000 + $10,000 + $35,000 + $5,000 = $90,000
Accounting profit:
Revenues - Explicit costs
$260,000 - $90,000 = $170,000
To calculate Peggy-Sue's economic profit, we need to consider both explicit and implicit costs. In this case, the implicit cost is the opportunity cost of her $100,000 investment. If she leaves her current cookie business, she can sell her investment for $40,000 and invest it at 10% per year. Therefore, her implicit cost is the forgone interest she could earn on that investment.
Implicit cost:
$40,000 x 10% = $4,000
Economic profit:
Accounting profit - Implicit cost
$170,000 - $4,000 = $166,000
Now let's move on to advising Peggy-Sue based on these calculations.