Question:

When calculating the economic profit; do we use cost incurred on fixed assets as part of total cost?

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If I invest $ 20000 in a machine producing ball point pens, and if the machine depreciates $2000 a year, I know that the $2000 is an implicit cost involved in, when calculating the economic profit. And if I pay $ 3000 as salaries to the machine operator, it goes as an explicit cost. If my total revenue is $ 40000, and the normal profit is $ 10000 during the year, I am now supposed to calculate the economic profit.

My question is, do I have to take the value of my machine ($ 20000) when calculating the total economic profit? If it is so, what classification it should fall into? Implicit, Explicit, or anything else?

Is my economic profit for the year $ 25000, or $ 5000?

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1 ANSWERS


  1. $5000, as investment incurred cannot be calculated as profit.  

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