profit_problem

profit_problem - Problems: Explicit and Implicit Cost and...

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Problems: Explicit and Implicit Cost and Accounting and Economic Profit or Loss Owner-operator Terry Smith works full-time as manager, chief cashier, and janitor in Terry’s Grocery. His next best alternative occupation is as a grocery manager at Publix for a salary of $30,000 annually. He has invested in refrigeration and other equipment with a current market value of $50,000; the current interest rate is 10%. He also purchased the building which his store occupies for $50,000; its annual market rental value is $5,000. Below is his accounting statement for a single year. Total Revenue Sales (groceries) $ 85,000 Costs (explicit) Groceries, wholesale $ 40,000 Utilities 2,000 Taxes 2,000 Advertising 1,000 Labor services (employees) 5,000 Total (explicit) costs $ 50,000 Net accounting profit $ 35,000 Additional (implicit) costs Salary (Terry’s labor) $ 30,000 Foregone interest (equipment) 5,000 Foregone rent (Terry’s building) 5,000 Total implicit costs $ 40,000 Total explicit and implicit costs $ 90,000 Economic profit (total revenue minus explicit and implicit costs) -$ 5,000 1. If Terry’s only objective is to maximize his income and if this data represents a typical year, will Terry continue to operate his business? 2. What would happen to explicit costs, accounting profit, implicit costs, and economic profit if Terry paid himself an explicit salary of $30,000? 3. What would happen to explicit costs, accounting profit, implicit costs, and economic profit if Terry did not own the builiding but instead leased it from another owner? 4. What would happen to explicit costs, accounting profit, implicit costs, and economic profit if the current market value of his equipment were zero?
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5. Suppose Terry expects sales in future years to increase to $95,000. Will Terry continue to operate the business? What incentives would be created for other Publix grocery managers?
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This note was uploaded on 04/07/2008 for the course ECO 2023 taught by Professor Mccaleb during the Spring '08 term at FSU.

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profit_problem - Problems: Explicit and Implicit Cost and...

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