Question

he following is cost information for the Creamy Crisp Donut Company:

Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000

Refer to the data. Creamy Crisp's accounting profit is:

Select one:

a. $150,000.

b. $380,000.

c. $230,000.

d. $294,000.

Answer 1

The accounting profit will only account for the cost which is being paid out, so all the foregone opportunity cost will not be a part of accounting profit and this is the main difference between accounting and economic profits.

So the total accounting cost here will be equal to, annual lease on building + payments to workers + costs of utilities.

= $22,000 + $120,000 + $8,000

= $150,000

And the revenue from the operations is equal to,

= $380,000

And the profit is calculated as,

Accounting Profit = revenue - accounting costs

Accounting Profit = $380,000 - $150,000

Accounting Profit = $230,000.

So the correct answer is option C, $230,000.