(a)
Accounting cost is the expenditure on raw materials and other resources used in production. It also includes the expenditure on labor.
In given case, Dan is employing his own labor as well as hired some workers.
So, salary paid to Dan and salaries paid to employees are expenditure on labor. Therefore, these are accounting costs.
Other accounting costs are supplies, electricity and water.
Calculate the accounting cost -
Accounting cost = Supplies + Electricity and water + Employees salaries + Dan's salary
Accounting cost = $150,000 + $15,000 + $50,000 + $60,000
Accounting cost = $275,000
Thus,
Cooke's Catering's accounting cost is $275,000.
(b)
Economic cost is sum total of accounting cost and opportunity cost.
Opportunity cost is the cost of resources supplied by owners.
In this case, owner is supplying his own labor as well as building.
If the building is not been utilized for business then it could have earned a rent of $100,000.
So,
Foregone rent = $100,000
Dan could have worked at catering company for $45,000 a year or at high end restaurant for $75,000 a year.
The next best alternative for Dan is to work at high end restaurant and earn $75,000.
So, by operating his own business, Dan is losing on a salary of $75,000.
Opportunity cost = Foregone rent + Foregone salary
Opportunity cost = $100,000 + $75,000 = $175,000
Calculate the economic cost -
Economic cost = Accounting cost + Opportunity cost
Economic cost = $275,000 + $175,000
Economic cost = $450,000
Thus,
Cooke's Catering's economic cost is $450,000.
(c)
Calculate the economic profit -
Economic profit = Revenue - Economic cost
Economic profit = $500,000 - $450,000
Economic profit = $50,000
Thus,
Cooke's Catering's economic profit is $50,000
In the problem, I am confused for economic cost because the EC is the sum of...
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