CA Foundation · Business Economics · Nature and Scope of Business Economics
Sharma Textiles earns ₹12,00,000 in total revenue. Its explicit costs are ₹8,00,000. The owner, Mr. Sharma, could have earned a salary of ₹2,50,000 elsewhere and could have earned ₹1,00,000 interest by lending the ₹10,00,000 of own capital invested in the firm. What is the firm's economic profit?
Economic profit is ₹50,000. Accounting profit is ₹4,00,000 after explicit costs of ₹8,00,000. Subtracting implicit costs, the owner's forgone salary of ₹2,50,000 and forgone interest of ₹1,00,000, gives ₹50,000 as economic profit.
- A₹4,00,000
- B₹1,50,000
- C₹50,000Correct
- D₹(-)1,00,000
Explanation
Accounting profit = 12,00,000 − 8,00,000 = ₹4,00,000. Implicit costs = 2,50,000 + 1,00,000 = ₹3,50,000. Economic profit = 4,00,000 − 3,50,000 = ₹50,000. Option A ignores implicit costs, and option B deducts only the salary.
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