Question

1. A person managing a dry-cleaning store for OMR 25,000 per year decides to open a dry-cleaning store. The revenues of the store during the first year of operation are OMR 100,000 and the expenses are OMR 35,000 for salaries, OMR 10,000 for supplies, OMR 8,000 for rent, OMR 2,000 for utilities, and OMR 5,000 for interest on bank loan.

*Calculate: ​​​​​​​​​

(a) The accounting profit, (1mark)

(b) The economic profit (2mark)

Answer 1

Answer: (a)

Accounting Profit is the difference between total revenue and explicit cost. Explicit costs are those costs which are directly or indirectly involved in running the business. It is calculated as:

Accounting Profit = Revenue - Explicit Costs

First, we will calculate the total explicit costs and it is as follows:

Explicit Costs	Amount(OMR)
Salaries	35,000
Supplies	10,000
Rent	8,000
Utilities	2,000
Interest on bank loan	5,000
Total	60,000

Therefore, Accounting profit = OMR 100000 - OMR 60000

= OMR 40000.

Answer: (b)

Economic Profit = Total Revenue - Explicit Costs- Implicit Costs (Opportunity Costs)

Here, implicit cost will be OMR 25000 as after opening the dry cleaning store, the person would not be getting this amount and would seek for its opportunity cost.

Economic Profit = OMR 100000 - OMR 60000 - OMR 25000

= OMR 15000.