Question

Danya plans to open an English course. Currently he earns Rp. 350 million per year teaching a language education institution and will have to give up this job if he opens a new English language course. If he chooses to open an English course, it will cost him rent and other operational costs of Rp. 2 billion per year.

a. How much does he need to generate positive accounting profit?
b. How much does he need to generate positive economic profit?

Answer 1

Accounting Profit :

Accounting profit the net income for a company, which is revenue minus expenses.

Economic Profit :

Economic profit is similar to accounting profit in that it deducts explicit costs from revenue. However, economic profit also includes the opportunity costs for taking one action versus another in the period.

A) In order to generate accounting profit , he must cover her rent and operating costs which are Rp. 2 billion(2000 million) , so he needs more than Rp.2000 million in order to generate positive accounting profit.

B) In order to generate positive economic profit , he must not cover only his rent and operating costs but he must have to consider opportunity cost which is Rp.350 million per year , so he needs more than (2000 + 350) = Rp.2350 millions to generate positive economic profit.