- Differentiate between Explicit and Implicit Costs, Accounting and Economic Profit.
The revenue cost statement for a popular grocery store owned and operated by John Mathew is presented below;
John Mathew owns and operates a corner grocery store.John works full time as the manager, chief cashier, and janitor.John had $ 140,000 worth of refrigeration and other equipment invested in the store. Last year, John's total sales (revenue)were 170,000.
During the the year he incurred the following costs:
Groceries wholesale $ 76,000, Utilities $4,000 Taxes $6,000, Advertising $2,000, Labor services $12,000.
If John had invested his funds he would have earned 5% interest. (Interest foregone on the $140,000* 5%) Do not include the investment of $140,000, only the interest forgone. If the building that John owned was not being used as a grocery store , it could be rented for $1,500 a month. (Rental income is thus forgone.). In addition, since John is tied up working in the the grocery store a $50,000 managerial position with the local jewel is gone.( Salary forgone)
- Calculate the explicit cost.
- Calculate the implicit Cost.
- Calculate the accounting profit
- Calculate the total cost
- Calculate the economic
profit/loss for John's Grocery store.
Hint: Examples of Implicit Cost: Self owned resources:Interest foregone, salary foregone, rent foregone & normal profit.
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