beginning of the year, a software developer quit his job and gave up a salary of $90,000 per year in order to start Turnip Tom’s organic farm. A partial income statement for the first year of operation for Turnip Tom’s, Inc., is shown below: Revenues $ 98,000 Operating costs and expenses
At the beginning of the year, a software developer quit his job and gave up a salary of $90,000 per year in order to start Turnip Tom’s organic farm. A partial income statement for the first year of operation for Turnip Tom’s, Inc., is shown below:
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Revenues |
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$ 98,000 |
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Operating costs and expenses |
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Cost of products sold |
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$ 15,500 |
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Selling expenses |
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$ 6,500 |
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Administrative expenses |
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$ 3,200 |
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Total operating costs |
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$ 25,200 |
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Income from Operations |
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$ 72,800 |
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Interest expense (bank loan) |
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$ 9,500 |
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Legal expenses |
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$ 1,200 |
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Income taxes |
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$ 22,000 |
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Net income |
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$ 40,100 |
To get started, Tom spent $125,000 of his own savings to purchase land and equipment to be used for the farm. During this year, Tom could have earned a 7 percent
(a) What are the total explicit, total implicit, and total economic costs for the year?
(b) What is accounting profit?
(c) What is economic profit?
(d) Using only the data given, would you say that the owner made a good economic decision to leave is job to start the organic farm? Explain.
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