Question

Examine Frank’s Motorcycle Business information when responding to questions about Ben’s business. These costs and incomes all refer to Frank’s first year of operation in business.

On the first day of his first year in business, Frank withdraws $80,000 dollars from a savings account that earned 4% per year to purchase tools and equipment to start his own shop that will specialize in servicing motorcycles. Frank decides to operate his business out of a commercial property that he owns and had previously leased for a fair market rental of $2,000 per month. On the first day of the business year he also quits his job as a teacher where he made $60,000 per year. Over the year he spends an additional $70,000 on parts and supplies. He hires one employee for a total labor cost of $40,000 per year. His taxes, utilities, office supplies, and other miscellaneous expenses total $50,000. Frank completes 275 repairs in his first year of operation and charges an average price of $1,000 per repair.

1)Calculate Frank’s total explicit costs for his first year in business.

2)Calculate Frank’s total implicit costs for his first year in business.

3)Calculate Frank’s accounting profit for his first year in businesses.

4)Calculate Frank’s economic profit for his first year in business

TRUE or FALSE. Frank is making a larger total cash income from his mechanic businesses than he did as a teacher.

Answer 1

We have been given the following information

Cost	Amount ($)
Implicit Cost
Interest foregone (4% on $80,000)	3,200
Rent forgone ($2000 per month)	24,000
Salary foregone	60,000
Total Implicit Cost	87,200
Explicit Cost
Parts and Supplies	70,000
Miscellaneous Expenditure	50,000
Total Explicit Cost	120,000
Total Economic Cost (Explicit + Implicit)	207,200

Accounting profit = Total Revenue – Total Explicit Cost

Total Revenue = Price × Output

Total Revenue = 1,000 × 275

Total Revenue = $275,000

Accounting profit = $275,000 – $120,000

Accounting profit = $ 155,000

Economic Profit = Total Revenue – Total Economic Cost

Economic Profit = $275,000 – $207,200

Economic Profit = $67,800

The statement that Frank is making a larger total cash income from his mechanic businesses than he did as a teacher is True.