Darnell lives in Philadelphia and runs a business that sells pianos. In an average year, he receives
Question:
Darnell lives in Philadelphia and runs a business that sells pianos. In an average year, he receives $842,000 from selling pianos. Of this sales revenue, he must pay the manufacturer a wholesale cost of $452,000; he also pays wages and utility bills totaling $301,000. He owns his showroom; if he chooses to rent it out, he will receive $38,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Darnell does not operate this piano business, he can work as an accountant and receive an annual salary of $48,000 with no additional monetary costs. No other costs are incurred in running this piano business.
a. Identify each of Darnell's costs in the following table as either an implicit cost or an explicit cost of selling pianos.
| Implicit Cost | Explicit Cost | |
The wholesale cost for the pianos that Darnell pays the manufacturer | | | |
The salary Darnell could earn if he worked as an accountant | | | |
The wages and utility bills that Darnell pays | | | |
The rental income Darnell could receive if he chose to rent out his showroom | | | |
b. Complete the following table by determining Darnell's accounting and economic profit of his piano business.
| Profit |
(Dollars) | |
Accounting Profit | |
Economic Profit | |
c. If Darnell's goal is to maximize his economic profit, he( should, should not) stay in the piano business because the economic profit he would earn as an accountant would be $______.
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates