fter working for 25 years as personal fitness trainers while raising their kids, three sisters cashed in a total of $120 comma 000 in bonds and decided to open a small, neighborhood fitness center. They spent the $120 comma 000 on exercise equipment, advertising, computer equipment, and other furnishings for the business. For the next 3 years, they took in $140 comma 000 in revenue each year, paid themselves $35 comma 000 annually each, and rented a space in a strip mall for $25 comma 000 per year. Before the investment, their $120 comma 000 in bonds were earning interest at a rate of 7 percent. Are they now earning economic profits? Explain your answer.

Question

Business

Clay

4 September, 09:19

fter working for 25 years as personal fitness trainers while raising their kids, three sisters cashed in a total of $120 comma 000 in bonds and decided to open a small, neighborhood fitness center. They spent the $120 comma 000 on exercise equipment, advertising, computer equipment, and other furnishings for the business. For the next 3 years, they took in $140 comma 000 in revenue each year, paid themselves $35 comma 000 annually each, and rented a space in a strip mall for $25 comma 000 per year. Before the investment, their $120 comma 000 in bonds were earning interest at a rate of 7 percent. Are they now earning economic profits? Explain your answer.

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Answers (1)

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Cleopatra · Answer 1

They are currently earning an economic profit of $1,600 per year

Explanation:

Economic profit = total revenue - accounting costs - opportunity costs

in this case:

opportunity costs = interest earned by their bond investment + the salaries of the three sisters = ($120,000 x 7%) + ($35,000 x 3) = $8,400 + $105,000 = $113,400

accounting costs = $25,000

total revenue = $140,000

Economic profit = $140,000 - $25,000 - $113,400 = $1,600