Question

The cost information for Delicious Pizza Company for the year 2019 is shown
as below:
Entrepreneur’s potential earnings as a salaried workers = RM50, 000
Monthly lease on building = RM2, 000
Annual revenue from operations = RM380, 000
Annual payment to workers = RM120, 000
Annual utilities (electricity and water) costs = RM8, 000
Annual entrepreneur’s potential economic profit from the next best
entrepreneurial activity = RM80, 000
Forgone interest on personal funds used to finance the business = RM6, 000

Based on the information given:
(i) Calculate the explicit costs for Delicious Pizza Company.
(ii) How much is the company’s implicit costs?
(iii) Determine the total economic costs.
(iv) How much is the accounting profit earned by the company? How
about economic profit?

Answer 1

(i)

Explicit cost = Annual lease + Payment + Utilities

= (12 x 2,000) + 120,000 + 8,000

= 24,000 + 128,000

= 152,000

(ii)

Implicit cost = Salary given up + Potential profit given up + Interest foregone

= 50,000 + 80,000 + 6,000

= 136,000

(iii)

Total economic cost = Explicit cost + Implicit cost

= 152,000 + 136,000

= 288,000

(iv)

Accounting profit = Revenue - Explicit cost

= 380,000 - 152,000

= 228,000

Economic profit = Revenue - Economic cost

= 380,000 - 288,000

= 92,000