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CMA Foundation · Fundamentals of Financial and Cost Accounting · Classification of Costs (CAS 1)

Mr. Iyer owns a shop that he uses for his own business. He could rent it out for Rs 25,000 per month. His business earns an accounting profit of Rs 70,000 per month before charging any rent for the shop. Considering the opportunity cost of the shop only, what is his monthly economic profit?

His monthly economic profit is Rs 45,000. The rent of Rs 25,000 he gives up by using the shop himself is an opportunity cost, and deducting it from the Rs 70,000 profit gives the true gain from running the business.

  1. ARs 45,000Correct
  2. BRs 70,000
  3. CRs 95,000
  4. DRs 25,000

Explanation

The forgone rent of Rs 25,000 is the opportunity cost of using the shop himself. Economic profit = 70,000 - 25,000 = Rs 45,000. Rs 70,000 ignores the opportunity cost, and Rs 95,000 wrongly adds the rent instead of deducting it.

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