Question

Speedy Garage Doors is a two-person firm offering installation and maintenance of electronic security systems. Each maintenance service call, which requires both locksmiths, generates a certain amount of revenue but takes both locksmiths away from being able to perform initial installations, where they would generate $100 each in profit for the company. $30 of vehicle costs (including fuel and depreciation) are incurred every tme a 1-hour service call is made. Each locksmith is paid $55.00 per year and has enough time to participate in 550 service calls per year or perform 550 installations.

If a maintenance service calls generates $250 in revenue, how much economic profit is make on 100 maintenance service calls?

Answer 1

Opportunity costs i.e. implicit costs for 100 maintenance service calls = profit foregone for 100 installations = $100 *100 = $10,000.

The vehicle costs = $30 * 100 = $3,000.

Labor costs per maintenance calls = $55/550 = $0.10. So, for 100 maintenance calls, total labor costs = 100 * $0.10 = $10

So, total explicit costs = vehicle costs + labor costs = $3,000 + $10 = $3,010.

Total revenue = $250 * 100 = $25,000.

Economic profit = total revenue - (implicit costs + explicit costs) = $25,000 - ($10,000 + $3,010) = $25,000 - $13,010 = $11,990.

answered by: anonymous