CA Foundation · Business Economics · Nature and Scope of Business Economics
Mr. Iyer runs a bakery in Bengaluru earning revenue of ₹9,00,000 with explicit costs of ₹6,00,000. He could earn a salary of ₹2,00,000 elsewhere and his own capital of ₹5,00,000 could earn 10% interest elsewhere. His economic profit is:
Economic profit is ₹50,000. Accounting profit is ₹3,00,000, from which implicit costs of ₹2,00,000 forgone salary and ₹50,000 forgone interest on own capital are deducted. Economic profit therefore equals ₹3,00,000 minus ₹2,50,000.
- A₹3,00,000
- B₹1,00,000
- C₹(−)50,000Correct
- D₹50,000
Explanation
Accounting profit = 9,00,000 − 6,00,000 = ₹3,00,000. Implicit costs = salary 2,00,000 + interest 50,000 = ₹2,50,000. Economic profit = 3,00,000 − 2,50,000 = ₹50,000. Check: the option of ₹1,00,000 ignores interest on capital, which is a missed implicit cost.
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