Managerial Econs

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SOLUTION
Explicit cost computation
Items | GH¢| Cost of products and services sold | 710,000| Selling expenses | 310,000| Administrative expenses | 90,000| Interest expense (bank loan) 90,000| Legal expenses to start business | 56,000| Income taxes | 330,000| TOTAL | 1,586,000|

TOTAL EXPLICIT COST = GH¢1,586,000

Total implicit cost
Personal savings of GH¢ 200000 will earn him 30% interest of that. =30% of 200000
=GH¢ 60,000 (Implicit cost)

TOTAL ECONOMIC COST
=Total explicit cost +Total Implicit cost
=1,586,000 + 60,000
=GH¢1,646,000

B. ACCOUNTING PROFIT
The Accountant takes into consideration explicit costs but does not take into consideration implicit costs: PROFIT=TOTAL REVENUE- TOTAL COST
Total Revenue=GH¢1,940,000
Total Explicit cost=GH¢1,586,000
Accounting profit=Total Revenue - Total Explicit cost
=1,940,000- 1,586,000
=GH¢ 354,000

C. ECONOMIC PROFIT
The Economist takes into consideration both Implicit and Explicit cost: Explicit cost + Implicit cost
=1,586,000+ 60,000
=GH¢1,646,000
PROFIT=Total Revenue -Total Economic cost
=1,940,000-1,646,000
=GH¢ 294,000

D. Taking into consideration the profit earned in c, I would love the owner of sound system to start the Sound Devices. This is because he will earn more than investing in stocks of other new businesses. In investing in stocks; he will earn;

30% 0f 200000
=GH¢60,000
Making a total of GH¢ 260,000
WHILES
In investing In Sound Devices, he will earn GH¢ 294,000...
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