Question

Kanchan wants to start her own boutique. Her monthly expenditure on salary will be Rs 5,000 & that on raw material and accessories is Rs 13,000. She is planning to use her garage which is currently earning her a rent of Rs78,000 per annum. To start this, she would have to give up her current job as a designer with a clothing brand where she is drawing a monthly salary of Rs 32,000. (5marks)

1. If she expects her sales to be Rs45,000 per month, find the accounting profit and economic profit.

2. Should she be starting her own business? Answer Asap

Answer 1

Q1 Her accounting costs are the ones that she incurs directly, i.e., pays to third parties. These are:

Salary 5,000 per month

Raw material 13,000 per month

Total Rs. 18,000 per month

Revenue Rs. 45,000 per month

Accounting profit = Rs. 45,000 - 13,000 = Rs. 32,000 per month

To find economic profit, we need to also deduct the implicit costs, i.e., salary and rent on garage that she foregoes

Salary foregone Rs. 32,000 per month

Rent foregone Rs. 78,000/12= Rs. 6,500 per month

Economic profit = Rs. 32,000 - 32,000 - 6,500 = (-)Rs. 6,500 per month

2. Since she's going to lose money when we consider salary and rent foregone (economic profit), she should not be starting her business.