Question

Although Goldman Sachs paid Heather $120,000.00 per year, she was not satisfied with her job. She had loved going white-water rafting and skiing with her family in Utah since she was a little girl. So last year, she decided to open her own business: Family Adventures. During the summer, she takes families on different white-water trips, and in the winter, she leads clients on skiing trips. To start her business, Heather borrowed $100,000 from a bank and used $90,000.00 of her savings. Her savings earned 10% interest. At the end of the year, she wanted to know whether her new business venture was worthwhile. The table below lists her total revenue and itemized costs for Family Adventures.

Item	Annual Dollar Value
Total revenue	$260,000.00
Employee wages	$140,000.00
Rent on her business office	$25,000.00
Payments on bank loan	$10,000.00
Utility and gas expenses	$5,000.00

Family Adventures' accounting profit was $

Family Adventures' economic profit was $   . (If the economic profit is less than zero, be sure to include the - sign.)

Answer 1

Calculate the total explicit cost -

Total explicit cost = Employee wages + Rent on her business office + Payments on bank loans + Utility and gas expenses

Total explicit cost = $140,000 + $25,000 + $10,000 + $5,000

Total explicit cost = $180,000

The total explicit cost is $180,000.

Heather earned $120,000 as salary. So, if she quit her job and starts her own business then she will lose this salary.

Foregone salary = $120,000

Heather has used her own saving of $90,000 to start her business.

These savings were earning interest at 10% per year. So, now she will be losing her interest.

Foregone interest = $90,000 * 0.10 = $9,000

Calculate the total implicit cost -

Total implicit cost = Foregone salary + Foregone interest

Total implicit cost = $120,000 + $9,000 = $129,000

The total implicit cost is $129,000

Calculate the accounting profit -

Accounting profit = Total revenue - Total explicit cost

Accounting profit = $260,000 - $180,000 = $80,000

Thus,

Family Adventures' accounting profit was $80,000.

Calculate economic profit -

Economic profit = Total revenue - Total explicit cost - Total implicit cost

Economic profit = $260,000 - $180,000 - $129,000 = $-49,000

Thus,

Family Adventures' economic profit was $-49,000.