Asked by Squid Neutral on Jun 17, 2024
Verified
Kim used to work at "The Big One" accounting firm, and she earned $50,000 a year. She saved her money and has now invested $100,000 in her own firm. Profit is $20,000 a year, which Kim receives as her only compensation. She concludes that this is great because a 20 percent return is much better than the 8 percent she could get in another investment (the opportunity cost of the funds). What is wrong with this line of thinking?
Opportunity Cost
The cost of missing out on the second-best option while choosing between two mutually exclusive options in a decision-making process.
Profit
The financial gain realized when the revenue generated from business activities exceeds the expenses, costs, and taxes needed to sustain the activity.
- Ascertain both explicit and implicit costs within business operations and evaluate their effect on profit determination.
Verified Answer
BC
Bhuvan ChhedaJun 22, 2024
Final Answer :
While Kim is correct in understanding the opportunity cost of her invested funds, she is ignoring the opportunity cost of her time. Presumably this opportunity cost is $50,000, so her total implicit cost would be this amount plus the $8,000 in foregone interest. Note that this analysis ignores taxes, which could alter the calculations.
Learning Objectives
- Ascertain both explicit and implicit costs within business operations and evaluate their effect on profit determination.