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The following is cost information for the Creamy Crisp Donut Company.
The following is cost information for the Creamy Crisp Donut Company.Entrepreneur's potential earnings as a salaried worker = $50,000
Annual lease on building = $22,000
Annual revenue from operations = $380,000
Payments to workers = $120,000
Utilities (electricity, water, disposal) costs = $8,000
Value of entrepreneur's talent in the next best entrepreneurial activity = $80,000
Entrepreneur's forgone interest on personal funds used to finance the business = $6,000
Creamy Crisp Donut Company...
A. has lower explicit costs, than implicit costs.
B. is earning a normal profit but not an economic profit.
C. is earning an economic profit.
D. is suffering an economic loss, when implicit costs are considered.
*ANSWER: C. is earning an economic profit.*
Final answer:The Creamy Crisp Donut Company is earning an economic profit by subtracting both explicit ($150,000) and implicit costs ($136,000) from total revenues ($380,000), resulting in a positive economic profit of $94,000.Explanation:When assessing whether the Creamy Crisp Donut Company is earning an economic profit, it's critical to calculate the total costs, including both explicit and implicit costs, and subtract them from the total revenues. Explicit costs are direct, out-of-pocket payments for expenses like leases and wages, while implicit costs represent the opportunity costs of not pursuing the next best alternative. The economic profit is defined as total revenues minus both explicit and implicit costs. Here's how it works out for the company:Total revenues: $380,000Explicit costs: ($22,000 + $120,000 + $8,000) = $150,000Implicit costs: ($50,000 + $80,000 + $6,000) = $136,000Economic profit: $380,000 - ($150,000 + $136,000) = $94,000Since the economic profit is positive ($94,000), it indicates that the Creamy Crisp Donut Company is indeed earning an economic profit....