Question

osts of Production: Differentiating Explicit & Implicit Costs Bob's Bed & Breakfast (15 marks) Bob recently quit a job that paid him $2,500 per month in order to buy a bed and breakfast house in a remote corner of Vancouver Island. The motivation for his life style change came from a surprise inheritance from his long lost uncle who he had never met. His uncle, feeling guilty for never sending "birthday money to his sister's son, had left Bob money to his sister's son, had left Bob $65.000 dollars in his will. Bob's mom told him to put the money in a corporate bond that was paying 9% return. Instead Bob decided to check out of the busy city life and buy the B&B. For the down payment and renovations, Bob used $50,000 of his inheritance. It turned out that Bob's remote B&B was much more popular than expected and his two rooms were rented out at $200 each for a total 425 nights combined between them, in just the first 12 months of operation! Bob paid the following out-of-pocket costs during the first year of operating the bed and breakfast business. Interest paid to bank monthly $ 2,100 Utility and Maintenance Expenses quarterly $ 4,140 Property Taxes and Insurance annually $ 2,210 Food for the year (cheap breakfasts!) $ 3,000 Part-Time Cleaning Staff monthly $ 300 Other (supplies, etc) in total for the year $ 1,330 1) Calculate the total annual explicit costs. Show calculations and explain. (2 marks)

Answer 1

1. Explicit costs are the direct costs a business occuers in its financial year. Explicit Cast Bank Interest $2100 Utility 2 Maintainence + $ 4140 Expeare Property Tax & Iusuance +$2120 Food +$ 3,000 Part time cleaina + $3600 staff ($300x12) Other expense + $ 1330 TOTAL EXPLICH COST 16,290

2. Annual salary $30,000 from job he quit $ 2500X12 Interest from $ 5,850 corporate bond $65,000x9080 TOTAL IMPLICIT Cost & 35,850 Implicit cost is the opportunity fogone for the choice takew. He gave up his job and the interest for his so Bed & Breakfast weriners.

= 85,000 3. TOTAL REVENUE у 420 x4 25 Less: TOTAL EXPLICIT COST ACCOUNTING PROFIT (16,240) $68,71 0 Accounting profet is the Схет о не лише соти hu ш (илии the & explicit cost.

4. ACCOUNTING PROFIT $68,710 sess IMPLICIT COST $.( 35,850) ECONOMIC FOST PROFIT $32,860 Economic profit is the nvenue from the current buriners oeer both the implicit & explicit cost. formula = REVENUE - IMPLICIT COST) - (EXPLICIT COST) - ACCOUNTING PROFIT E) IMPLICIT PROFIT