What is the difference between Accounting and Economic Profit|Quick homework help
Posted: January 23rd, 2023
Assignment # 1 (Managerial Economics Textbook )
1. Why should managers use study supply, demand and their elasticities?
2. What is the difference between Accounting and Economic Profit?
Case Study:
3-2 House Closing
You’ve entered into a contract to purchase a new house, and the closing is scheduled for next week. It’s typical for some last-minute bargaining to occur at the closing table, where sellers often try to tack on extra fees. You have three options for the closing: (1) attend yourself, (2) send an attorney authorized to close only per the previously negotiated terms, or (3) pre-sign all the closing documents per the current terms and not attend the closing. Consider each bargaining position; which position would you go with and why?
SOLUTION
Accounting profit is the difference between a company’s revenue and its expenses. It is typically calculated by subtracting all costs, including both variable and fixed costs, from total revenue. Accounting profit is used to measure a company’s financial performance and is reported on its income statement.
Economic profit, on the other hand, is the difference between a company’s revenue and its opportunity costs. Opportunity costs include not just the explicit costs of production, but also the implicit costs of foregone opportunities. For example, if a business owner could have earned a higher return by investing their capital in a different venture, that opportunity cost would be included in the calculation of their economic profit.
A case study: A company produces and sells a product for $100 per unit. The variable cost of production is $70 per unit and the fixed cost is $50,000. The company produced and sold 100,000 units.
- Accounting profit = (100-70) x 100,000 = $3,000,000
- Economic profit = (100-70-opportunity cost) x 100,000 = $3,000,000 – opportunity cost
In this example, the accounting profit is $3,000,000, but the economic profit would be lower if the opportunity cost is higher than zero.
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