Question

1. A partial income statement from Webfoot Industries, Inc. is shown below: Revenues Revenue from sales of goods and services$29,000,000 Operating costs and expenses: Cost of products and services sold..$15,000,000 Selling expense$2,235,000 Administrative expenss$1,765,000 Total operating costs and expenses Income from operations $10,000,000 $19,000,000 Interest expense (corporate bonds &loans...$475,000 Non-recurring legal expenses. Income taxes Net i $285,000 .. $5,245,000 $3,995,000 Last year, Webfoot owned and occupied an officeQuilding in downtown Portland. The building could have been leased to other businesses for $2,500,000 in lease income. Webfoot also owned undeveloped land valued at $10,000,000. Owners of Webfoot could earn a 6 percent rate of return on funds invested elsewhere a. Last year, Webfoot's total explicit costs of using market-supplied resources were b. Webfoot's total implicit costs of using owner-supplied resources equals $ d. Webfoot's accounting profit was $ c. Total economic cost was $ e. Economic profit was $ f. The Board of Directors believes Webfoot's owners could have earned 8 percent, rather than 6 percent, on funds they could invest elsewhere. At an 8 percent rate of return, economic profit last year was $ 80o,ooo

Answer 1

Solution:

Revenue	$29,000,000
Costs of Products	$15,000,000
Selling Expenses	$2235,000
Administrative expenses	$1,765,000
Total operating cost	$19,000,000
Income from operations	$10,000,000
Interest expenses	$475,000
Non recurring legal expenses	$285,000
Income tax	$5,245,000
Net income	$3,995,000

Implict Costs			8%
Rent on building		2,500,000
Owners land of $10,000,000@6%	10,000,000	600000	800000
Total explict cost		3100000	3300000
Economic profit		895000	695000

Total operating costs	19,000,000
Interest expenses	475,000
Non recurring legal expenses	285,000
Income tax	5,245,000
Explict costs	25005000

1. Webffoots total explict costs of using market supplied resources were $25005000 Explict costs are all direct costs incurred.
2. Webfoot’s total implict costs of using owner-supplied resources equals $3100000

Total implict cost is the opportunity cost of building and land that is 2,500,000+6% return on 10,000,000

3. Total economic cost is $ implict Cost +explict cost gives the economic cost
4. Webfoot’s accounting profit $ net income is the accounting profit:$ $3,995,000.
5. Economic profit is $895000
6. The board of directors believes Webfoot’s qwners can earn8% rather than 6% on funds they could invest elsewhere. At an 8% rate of return, economic profit last year was $695000