Ellie has been working for an engineering firm and earning an annual salary of $80,000. She decides to open her own engineering business. Her annual expenses will include $15,000 for office rent, $3,000 for equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a secretary/bookkeeper. Ellie will cover her start-up expenses by cashing in a $20,000 certificate of deposit on which she was earning annual interest of $500.
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a) Implict cost = Annual salary she could earn in the engineering firm + Interest she was earning on Certificat eof deposit
= 80,000 + 500
= $80500
b) Accounting cost = office rent + equipment rental + supplies + utilities + salary of a secretary/bookkeeper.
= 15000 + 3000 + 1000 + 1200 + 35000
= $55200
c) revenue totals will yield Ellie’s business $50,000 in economic profits
Economic profit = Revenue - total cost ( implicit + accounting)
50,000 = Revenue - ( 80500 + 55200)
Revenue = 50,000 + 135700
= 185700
So, $185700 revenue totals will yield Ellie’s business $50,000 in economic profits.
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