Question

Ms. Buttercup was working as an HR person at an automotive company and was getting paid $56,000 annually. Last year, she opened a Cupcake shop and invested her savings that was bringing $4,000 of interest income annually. In order to operate the business, Ms. Buttercup pays: Monthly lease on building = $2,000, Payments to workers per month = $5,000, Utility (electricity, water, disposal) costs per month = $1,000, and monthly material cost = $8,000. Average monthly sales of cupcakes are $30,000
What is Ms. Buttercup’s Cupcake store's annual economic profit?

Multiple Choice

• $108,000

• $112,000

• $48,000

• $168,000

Answer 1

Implicit Cost = Cost sacrificed due to business = Interest+ Salary = $56,000+$4000 = $60000

Explicit Cost = Direct Cost of business= lease+ utility + wages + material

= $2000+$1000 +$5000+$8000

= $16000

Annual Cost = Explicit Cost *12 = $16000*12 = $192,000

Annual Sales = Monthly Sales *12 = $30,000*12 = $360,000

Economic Profit = Sales - (Implicit Cost+ Explicit Cost)

= $360,000-(192,000-60,000)

= $108,000

Therefore (a)$108,000 is the answer to this question