Question

Consider the following information about a business Diane opened last year: price = $20, quantity sold = 25,000; implicit cost = $255,000; explicit cost = $360,000. Assuming that all relevant costs and revenue are noted, what was Diane's accounting profit?

Answer 1

Explanation: $140,000

Accounting profit is the difference between revenue and explicit cost.

Explicit costs are the actual costs incurred in the running of the business.

Revenue = price × quantity sold

= $20 × 25000 = $500,000

$500,000 - $360,000 = $140,000

Implicit costs are also referred as opportunity cost. They are used in calculating the economic profit.

Economic profit = Accounting profit - implicit cost