Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial

Harvey quit his job at State University where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10% interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 each. Of the $75, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. What is the accounting profit generated by Extreme Gaming in the first year

Answers

a) $160,000

Explanation:

Economic Profit is calculated by deducting the opportunity cost  and monetary costs from the revenue. Whereas Accounting Profit can be calculated by deducting the only monetary costs from the revenue.  

Economic profit = Revenue - Opportunity cost - Monetary cost

Revenue = 11,000 units x $75 = $825,000

Opportunity costs

Salary = $45,000

Entrepreneurial income = $5,000

Interest Income = $100,000 x 10% = $10,000

Total Opportunity cost = $60,000

Monetary costs

Cost = 11,000 units x $55 = $605,000

Economic profit = $825,000 - $60,000 - $605,000 = $160,000

The explicit costs of Harvey's firm in the first year were $605,000

Explanation:

According to the given data we have the following:

In the first year, the firm sold 11,000 units of software

$55 goes for the costs of production, packaging, marketing, employee wages and benefits

Therefore, in order to calculate explicit costs of Harvey's firm in the first year we would have to make the following calculation:

explicit costs of Harvey's firm= units of software sold*costs of production, packaging, marketing, employee wages and benefits

explicit costs of Harvey's firm=11,000*$55

explicit costs of Harvey's firm=$605,000

The explicit costs of Harvey's firm in the first year were $605,000

The options are wrong,find below correct multiple choices:

$605,000

$825,000

$655,000

$150,000

The correct option is $605,000

Explanation:

Explicit costs are costs  incurred  that require actual cash settlement not costs of alternative forgone as in the case of implicit costs.

There is only example of explicit cost for Harvey Business in the first year of operation,which is the cost of production,packaging,marketing,employee wages and benefits and rent on a building.

In other words,the explicit costs incurred in year one =$55*11,000 units

                                                                                          =$605,000

The correct option  is the of those ones provided above.

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