Question

This week’s learning of marginal analysis is fundamental to decision making. To accurately apply this analysis, we need to understand the full range of costs and benefits – tangible and intangible. To make this learning real, think about a decision at work where a decision was made that did, or did not, incorporate hidden costs and benefits. What was the right approach to take regarding this matter? Explain.

Alternatively, you could consider a personal decision you made that involved both explicit and implicit costs and potentially sunk cost. Evaluate your decision process and think about how you would have made the decision based on your learning this week.

Include in your discussion, the concepts of economic profit and loss. Here is another example that you could work through to contrasting economic versus accounting profit and loss, highlighting the importance of opportunity cost.

Robert Bentley owns and operates the Bentley Clothing Store. A traditional income statement is shown below. There is no outstanding mortgage and the building is fully depreciated. If Bentley could rent the building for $88,000 net per year and could work at another business for an annual salary of $130,000, what is the economic Profit/Loss?

Accounting Income Statement

Net Sales		$650,000
Less Cost of Goods Sold		($250,000)
Gross Profit		$400,000
Less Expenses
Salary	$150,000
Advertising	$30,000
Utilities & Maintenance	$20,000
Miscellaneous	$10,000
Total		($201,000)
Net Profit before Tax		$190,00

Answer 1

Net profit before tax = 650000 - 250000 - 210000

Net profit before tax = $190000

The above profit, does not consider implicit cost, but economic profit considers implicit costs as well, then:

Economic profit = Net profit before tax - annual salary foregone - annual rent foregone

Economic profit = 190000 - 130000 - 88000

Economic profit = -$28000

So, there is an economic loss of $28000.