Consider the revenues and costs in 2019 for Spruce Decor Inc., an Alberta-based furniture company entirely owned
Question:
Consider the revenues and costs in 2019 for Spruce Decor Inc., an Alberta-based furniture company entirely owned by Mr. Harold Buford.
Furniture Sales | $ 645 000 |
Catalogue Sales | $ 12 000 |
Labour Costs | $ 325 000 |
Materials Costs | $ 157 000 |
Advertising Costs | $ 28 000 |
Debt-Service Costs | $ 32 000 |
a. What would accountants determine Spruce Decor’s profits to be in 2019?
b. Suppose Mr. Buford has $400 000 of capital invested in Spruce Decor. Also suppose that equally risky enterprises earn a 16 percent annual rate of return on capital. What is the opportunity cost for Mr. Buford’s capital?
c. What are the economic profits for Spruce Decor in 2019?
d. If Spruce Decor’s economic profits were typical of furniture makers in 2019, what would you expect to happen in this industry? Explain.
Opportunity CostOpportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
Step by Step Answer:
a As shown in Table 71 in the chapter accounting profits are equal to revenues minus explicit costs ...View the full answer
