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Chapter 21: Q. 7 (page 465)

In Problem 21-6, that you have now operated your consulting firm for a year. At the end of the first year, your total revenues are $77,250. Based on the information in Problem , what is the accounting profit, and what is your economic profit?

Short Answer

Expert verified

The accounting profit is$40,250

The economic profit is zero

Step by step solution

01

Introduction

The amount of money earned after both explicit and implicit costs have been taken into account is referred to as economic profit. Accounting profit refers to a company's net income, or revenue less expenses. Total costs are subtracted from a company's or investment's total income or return to calculate economic profit.

02

Explanation

Accounting profit = total revenue minus explicit costs. The entire expenditure is $37,000(12,000+1,000+20,000+4,000=37,000). As a result, the accounting profit is $40,250(77,250-37,000=40,250)

Total revenue is subtracted from explicit and implicit costs to arrive at the economic profit. We have an unspoken cost.$40,250As a result, there is no financial profit.(77,250-37,000-40,250=0)

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Most popular questions from this chapter

Suppose that the interest rate in Japan is only 2percent, while the comparable rate in the United States is localid="1651988274892" 4percent. Japan's rate of inflation is 0.5percent, while the U.S. inflation rate is 3percent. Which economy has the higher real interest rate?

Discuss how the interest rate performs a key role in allocating resources and calculate the present discounted value of a payment to be received at a future date

Take a look at Figure 21-2. Explain why the figure implies that if the amount of accounting profit were to shrink to zero while the normal rate of return on investment remained unchanged, economic profit necessarily would become negative.

Explain the basic differences between a share of stock and a bond.

The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is 20percent and the personal income tax rate is localid="1653216490078" 30percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate.

a. If the owner of WebCity expects to earn localid="1653216495193" \(100,000in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen?

b. What is the dollar value of the after-tax advantage of the form of organization determined in part (a)?

c. Suppose that the corporate form of organization has cost advantages that will raise beforetax profits by localid="1653216505277" \)50,000. Should the owner of WebCity incorporate?

d. Based on parts (a) and (c), by how much will after-tax profits change due to incorporation?

e. Suppose that tax policy is changed to completely exempt from personal taxation the first localid="1653216517393" $40,000per year in dividends. Would this change in policy affect the decision made in part (a)?

f. How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships?
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