John and Ruth Brown decide to open a delicatessen in a building that they own in a shopping center. They invested $60,000 of their own financial capital in it and considered its management to be their full-time jobs. Total Revenue or sales is $140,000 [20,000 meals @ average price of $7.00] per month. Cost of goods sold is $60,000 per month and operating expenses is $50,000 per month. If John and Ruth worked for someone else, they expected to earn a monthly salary of $12,000. John and Ruth could rent the building to someone else and expected to earn a monthly rental income of $5,400. If John and Ruth invested the $60,000 capital elsewhere [with equal risk], they expected to earn $600 per month of interest income.
.4 Calculate John and Ruth’s accounting profit, Show all work. ***(Should I subtract the $60,000 they invested here?!?!?)***
Accounting Profit = Revenue – Explicit Expense
Accounting Profit = $140,000 – [$60,000 + $50,000]
Accounting Profit = $30,000
Your answer is okay. The difference between the economic profit and accounting profit is that the opportunity cost is not considered in determining the accounting profit.
The accounting profit = Total Revenue – Explicit Costs
The accounting profit = 140000 – (60000+50000) = $ 30000
The economic profit = Accounting profit – Opportunity cost
The economic profit = 30000 – (2000 + 5400 + 600) = $ 12000
As your substitutions are done perfectly in the accounting profit equation (it is perfect), I appreciate your concern and involvement in studies.
Good luck.