Question

The revenue cost statement for a popular grocery store owned and operated by John Mathew is presented below;

John Mathew owns and operates a corner grocery store.John works full time as the manager, chief cashier, and janitor.John had $ 140,000 worth of refrigeration and other equipment invested in the store. Last year, John's total sales (revenue)were 170,000.

During the the year he incurred the following costs:

Groceries wholesale $ 76,000, Utilities $ 4000 Taxes$ 6000, Advertising $ 2000, Labor services $ 12000.

If John had invested his funds he would have earned 5% interest. (Interest foregone on the $140,000* 5%) Do not include the investment of $ 140,000, only the interest forgone. If the building that John owned was not being used as a grocery store , it could be rented for $ 1500 a month. (Rental income is thus forgone.). In addition, since John is tied up working in the the grocery store a $ 50,000 managerial position with the local jewel is gone.( Salary forgone)

Show your Computations to receive full credit: 5 Points.

1. Calculate the explicit cost.
2. Calculate the implicit Cost.
3. Calculate the accounting profit
4. Calculate the total cost
5. Calculate the economic profit/loss for John's Grocery store.

Answer 1

Explicit Costs

= Groceries Wholesale + Utilities + Taxes + Advertising + Labour Services + Interest on Investment

= $76000 + $4000 + $6000 + $2000 + $12000 ,+ 5/100 * $140000

= $100000 + $7000 = $107000

Implicit Costs

= Rental Income from Building + Salary Forgone

= $1500 * 12 + $50000 = $18000 + $50000 = $68000

Accounting Profit

= Total Revenue - Explicit Costs

= $170000 - $107000 = $63000

Total Cost

= Explicit Costs + Implicit Costs

= $107000 + $68000 = $175000

Economic Profit / Loss

= Total Revenue - Total Explicit Costs - Total Implicit Costs

= $170000 - $107000 - $68000

= $63000 - $68000

= -$5000

John's Grocery Store is incurring Economic loss of $5000.