Question

At the beginning of the year, a high school football coach decided to leave his job and give up his annual coaching salary of $55,000 and open his own sporting goods store. A partial income statement for follows: Revenues Revenue from sales of goods and services .............. $210,000 Operating costs and expenses: Cost of products and services sold .......................... $82,000 Selling expenses ...................................................... $6,000 Administrative expenses ......................................... $12,000 Total operating costs and expenses ...................... $100,000 Income from operations .............................................. $110,000 Interest expense (bank loan) ....................................... $14,000 Non-recurring expenses to start business .................... $24,000 Net income .................................................................. $72,000 To get the sporting goods store opened, the former coach used $60,000 of his personal savings. The coach opened his store in a building that he owns. Prior to opening his store, the building was rented for $36,000 per year. The coach could have earned 5 percent return by investing in stocks of other new businesses with risk levels similar to the risk level associated with his new sporting goods store. a. The former high school coach incurs $_______________ of total explicit costs for using market-supplied resources. b. The opportunity cost of the owner’s equity capital is $______________ annually. c. Total implicit cost of owner-supplied resources is $____________. d. Total economic cost is $_______________, and accounting profit is $_______________. f. By how much did coach’s wealth change by opening the sporting goods store?

Answer 1

a) Explicit costs = Total Operating costs and expenses = $100,000

b) Opportunity cost of the owner’s equity capital is the interest foregone which is equal to $60,000*5% = $3000

c) Total implicit cost = Opportunity cost of the owner’s equity capital + Rent foregone = $3000 + $36000 = $39000

d) Total economic cost = Explicit Cost + Implicit cost = $100,000 + $39,000 = $139,000

Economic profit = Total Revenue ? Total Economic Cost = $210,000 - $139,000 = $71,000

e) Accounting profit = Total Revenue ? Explicit Cost = $210,000 - $100,000 = $110,000

f) Coach gave up a salary of $55,000 to start his own store. As per the accounting profit, change in salary = $110,000 - $55,000 = $55,000