Answer to Question #142328 in Finance for Mr. Dinesh Pal Singh

Question

14. Consider an independent businessperson who has an MBA degree and is considering investing $100,000 in a retail store that she would manage. There are no other employees. The projected income statement for the year as prepared by an accountant is as below
Sales $90,000
Less: Cost of Goods Sold 40,000
Gross Profit 50,000

Less: Advertising 10,000 Depreciation 10,000
Utilities 3,000
Property Tax 2,000
Miscellaneous Expenditure 5,000
Sub total 30,000
Net Accounting Profit is 50,000 - 30,000 = 20,000
As an Economist you recognize other costs, defined as implicit costs. What are they? If you include them in the above statement will you show profit or loss? Illustrate with your own implicit costs.

Answer 1

The possible implicit costs are some other alternatives on which this businessperson can spend $100,000. If you include them in the above statement, then you are likely to show loss.