operates a variety store that provides an annual revenue of $489,000. Each year, he pays $25,100 in
Customer X operates a variety store that provides an annual revenue of $489,000. Each year, he pays $25,100 in
rent for the store, $15,020 in business taxes and $350,010 on products to sell. He estimates that the $80,040 which he has personally invested in the business from his savings could have brought him 20% interest if invested in government bonds. He also estimates that he and his family could earn a total annual wage of $90,400 if they worked somewhere other than the store.
(a) Calculate the total explicit cost and total implicit cost of running the variety store.
(b) What is the accounting profit made by the variety store?
(c) What is the economic profit of the store?
(d) Explain why the economic profit is considered as being superior to the accounting profit as an indicator of the overall performance of this business.
(e) Explain why the concept of economic profit is not frequently used by accountants.