Help with Accounting homework: accounting costs vs economic costs!

Posted on 2013-11-22 13:18:00 in Accounting by ALEX MORGAN

Sally quit her duty as an auto mechanic earning $50,000 per year to start her own business. To save money, she operates her garage out of a small building she owns which, until she started her own business, she had rented out to someone else for $10,000 per year. She also invested her $20,000 savings (which earned a market interest rate of 5% per year) into her business. You are given the following information about her first year of her operations.

Total Revenue $120,000
Employee’s wages $ 40,000
Material Cost $15,000
Rental of Equipments $ 5,000

a. Calculate her accounting costs.
b. Calculate her economic costs.
c. Calculate her accounting profit. What is her economic profit?
d. Sally tells you that she would really like to move to a location closer to town but she decided against it because "right now I don't pay any rent and it will cost me $10,000 a year to rent near town." Do you agree with her reasoning?

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