After graduation, you face a choice. One option is to work for a multinational consulting firm and earn a starting salary (benefits included) of $40,000. The other option is to use $6,000 in savings to start your own consulting firm. You could earn an interest return of 7 percent on your savings.

You choose to start your own consulting firm. At the end of the first year, you add up all of your expenses and revenues. Your total includes $10,000 in rent, $1,000 in office supplies, $24,000 for office staff, and $4,000 in telephone expenses, revenues totaled $147,600.

Based on the information provided, what were your total explicit costs? Your implicit costs? What was your accounting and economic profit this first year?

What were your total explicit costs?

Explicit costs are costs for which a direct payment is made by the customer, in this case the total direct payments made are:

Rent + office supplies + office staff + telephone expenses

= $10,000 + $1,000 + $24,000 + $4,000

Explicit cost = $39,000

What were your total implicit costs?

Impilicit costs are opportunity costs meaning, the cost incurred by not availing the next best alternative. In this case the implicit costs are:

Foregone wage and benefits + Foregone Interest + Savings used

Foregone Interest = $6,000*7% = $420

40,000 + 420 + 6,000

Implicit Cost = $46,420

What was your accounting and economic profit this first year?

Accounting profits = Total Revenues - Explicit costs

Here Revenue = $147,600

Accounting profits = $147,600 - $39,000

Accounting profits = $108,600

Economic profit = Total revenues - Explicit costs - implicit costs

Economic profit = $147,600 - $39,000 - $46,420

Economic profit = $62,180

The accounting profit for the first year was $108,600 and the economic profit for the year was $62,180

Total explicit cost = $39,000

Implicit cost = $40,420

Accounting profit = $108,600

Economic profit = $68,180

Explanation:

Total explicit costs will be the total amount spent.

Therefore explicit costs =

Rent + office supplies + office staff + telephone expenses

Explicit costs = 10000 + 1000 + 24000 + 4000 = $39,000

Implicit costs = 40000 + (6000 * 0.07) = $40,420

Accounting profit = Total revenue - Total explicit costs

Accounting profit = $147,600 - $39,000 = $108,000

Economic profit = Total revenue - Total opportunity cost.

(Where total opportunity cost = explicit cost + implicit cost)

Therefore economic profits =

$147,600 - ($39,000+$40,420)

= $68,180.

Therefore,

Total explicit cost = $39,000

Implicit cost = $40,420

Accounting profit = $108,600

Economic profit = $68,180