Mahmud Hassan inherited $250,000 from a great uncle, and immediately quit his software engineering job to start his own catering business, BigM’s Catering (BigM). Mahmud had been earning $125,000 per year as a software engineer. If Mahmud had NOT started BigM, he could have invested the money in a friend’s tech start-up company and earned a guaranteed return of 15%. However, Mahmud loves food and wanted to work for himself. The catering business’s accounts for 2020 are as follows (assume NO income taxes): Revenue $600,000 Cost of goods sold 250,000 Salaries expense 100,000 Advertising expense 65,000 Rent expense 50,000
Mahmud Hassan inherited $250,000 from a great uncle, and immediately quit his software engineering job to start his own catering business, BigM’s Catering (BigM). Mahmud had been earning $125,000 per year as a software engineer. If Mahmud had NOT started BigM, he could have invested the money in a friend’s tech start-up company and earned a guaranteed return of 15%. However, Mahmud loves food and wanted to work for himself. The catering business’s accounts for 2020 are as follows (assume NO income taxes): Revenue $600,000 Cost of goods sold 250,000 Salaries expense 100,000 Advertising expense 65,000 Rent expense 50,000
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Mahmud Hassan inherited $250,000 from a great uncle, and immediately quit his software engineering job to start his own catering business, BigM’s Catering (BigM).
Mahmud had been earning $125,000 per year as a software engineer. If Mahmud had NOT started BigM, he could have invested the money in a friend’s tech start-up company and earned a guaranteed return of 15%. However, Mahmud loves food and wanted to work for himself. The catering business’s accounts for 2020 are as follows (assume NO income taxes):
|
Revenue |
$600,000 |
|
Cost of goods sold |
250,000 |
|
Salaries expense |
100,000 |
|
Advertising expense |
65,000 |
|
Rent expense |
50,000 |
Required:
- Identify the name of the costs that accountants typically concentrate on and the name of the costs that economists typically concentrate on.
- Determine BigM’s accounting profit for 2020.
- Determine BigM’s economic profit for 2020.
- Determine if BigM is a successful business and explain whether Mahmud made a good choice.
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