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27 October, 06:05

Suppose a family-owned donut shop has $80,000 in total revenues, $36,000 in rent, and $20,000 in additional operating costs. The husband and wife work in the shop and pay no wages to themselves or others. The economic profits from the donut shop are

A) $24,000.

B) less than $24,000.

C) more than $24,000.

D) $80,000.

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Answers (2)
  1. 27 October, 06:14
    0
    B) less than $24,000.

    Explanation:

    Given:

    Revenue: $80,000

    Renting fee: $36,000 Operating costs: $20,000

    So earning before tax is:

    Revenue - Renting fee - Operating cost

    = $80,000 - $36,000 - $20,000

    = $24,000

    In this case, they want to know the economic profits from the donut shop, which means that it will be less than $24,000 because they did not count the wage of the husband and wife.
  2. 27 October, 10:05
    0
    B) less than $24,000

    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

    Accounting profit = Revenue - Monetary cost

    Opportunity costs are all those losses which are faced for choosing an alternative like loss of interest income in case of investment in the business.

    Revenue = $80,000

    Monetary costs

    Rent = $36,000

    Operating costs = $20,000

    Total Monetary costs = $56,000

    Accounting profit = $80,000 - $56,000 = $24,000

    Economic profit need to deducted opportunity cost from accounting profit, which is not given, so the economic profit will be less than $24,000.
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