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16 October, 11:22

Joe quits his computer programming job, where he was earning a salary of $50,000 per year, to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the fol - lowing expenses: salary paid to himself, $40,000; rent, $0; other expenses, $25,000. Find the accounting cost and the economic cost associated with Joe's computer software business.

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  1. 16 October, 11:54
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    Accounting cost = $65,000.

    Economic cost = $99,000

    Explanation:

    Accounting costs represent all amount spent on transactions for the purchase of generate revenue. These are also known as explicit costs

    Accounting cost for Joe =

    40,000 + 25,000 = $65,000.

    Economic costs on the other hand capture all accounting costs together with opportunity costs. Opportunity cost is the value of the next best alternative sacrificed in favor of a decision. Opportunity cost is also known as implicit cost

    The opportunity cost for Joe includes

    $10,000 reduction in salary he forfeited to start his business i. e ($50,000 - $40,000)

    $24,000 rent he no longer receives.

    Total opportunity cost = $10,000 + $24,000 = $34,000

    Hence economic cost =

    = $65,000 + $34,000

    =$99,000
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