Question

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Kenji lives in Houston and runs a business that sells pianos. In an average year, he receives $704,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $404,000; he also pays wages and utility bills totaling $286,00o. He owns his showroom; if he chooses to rent it out, he will receive $3,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Kenji does not operate this piano business, he can work as an accountant, receive an annual salary of $20,000 with no additional monetary costs, and rent out his showroom at the $3,000 per year rate. No other costs are incurred in running this piano business. Identify each of Kenji's costs in the following table as either an implicit cost or an explicit cost of selling pianos. Implicit Cost Explicit Cost The wages and utility bills that Kenji pays The wholesale cost for the pianos that Kenji pays the manufacturer The salary Kenj culd eait he worked as an accountant The rental income Kenji could receive if he chose to rent out his showroom

Answer 1

The difference between the economic profit and the accounting profit is that while calculating the accounting profit the implicit costs are excluded and it is added in the calculation of economic profit so the economic profit will be much less than the accounting profit. The difference between the implicit costs and the explicit cost is that the explicit costs are the expenses that is directly made out of the pocket. While the implicit costs are some kind of opportunity costs that is forgone.

Accounting profit= Total revenue- explicit costs.

Economic profit = Total revenue - (explicit costs+implicit costs).

Accounting profit =704,000-690,000 (404,000+286,000)

Implicit costs Explicit costs. The wages and the utility bills that keny pays The wholesale cost for the pianos that keni pays the manufacturer The salary thatkeni could earn if he worked as an assistant The rental income that keni could earn if he chooses to rent out his showroom

= 14000

Economic profit = 704,000- 713000(404,000+286,000+20,000+3000)

= -9000.

Implicit costs Explicit costs. The wages and the utility bills that keny pays The wholesale cost for the pianos that keni pays the manufacturer The salary thatkeni could earn if he worked as an assistant The rental income that keni could earn if he chooses to rent out his showroom