Implicit Cost Example

The JJVB Bottling company

The Facts:

• Jack and Jill put in $50,000 of own money
• Bought equipment and bottles for $30,000 and $15,000, respectively
• Hired one employee, $20,000/year
• Sales for year were $100,000
• Jack quit job to become bottler. Was earning $30,000/yearJill kept old job (worth $30/hr) but cut back on leisure 10 hours/week for each of 50 weeks.
• Cash expense: $10,000/year
• Inventory at year's end worth $20,000
• Market value of equipment $28,000 at year's end

The assumptions: JJVB accountant depreciates equipment over 5 years (straight line). Interest rate for the year averaged 10%.

Questions:

• What is JJVB accounting profit?
• What is JJVB economic profit?

Accounting			Economic
Revenue:	100,000		Revenue	100,000
Costs:
Equipment	30,000		Equipment	30,000
Bottles	15,000		Bottles	15,000
Labor	20,000		Labor	20,000
Cash	10,000		Cash	10,000
Inventory	20,000		Inventory	20,000
Depreciation	6,000
			Depreciation	2,000
			Interest	5,000
			Jack's time	30,000
			Jill's time	3,000
			Normal Profit	3,000
Cost:	101,000			138,000
Profit:	-1,000			-38,000

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This page was last modified Wednesday, January 29, 1997.