RE: Week 3 | Discussion
In this week’s discussion, it is assumed that you are the owner of a business or you would like to open a business. This week’s question addresses two issues:
First, identify your fixed costs, variable costs and the implicit costs in that business:
Fixed Cost are paid regardless if you are able to sell or not sell, so even if you are not making any money, the fixed cost still needs paid. This will include your payroll and your expenses, such as rent or utilities.
Variable Cost is the advertising and marketing, insurance, inventory, etc. Variable costs are paid out to any of your vendors/suppliers and shipping.
Implicit costs are costs that are related to a tradeoff, such as running my business from my home instead of paying rent for running my business in a leased building.
The business that I own is a repurposed furniture and antiques store.
Antique merchandise purchased at auction
Fees charged from credit card companies
Store is run from the first floor of my home. This will save money instead of leasing a building.
Instead of keeping my office job, I am working full time in my own business to have it operational without hiring a manager.
What is the difference between economic profit and accounting profit?
Accounting profit is the cost of what a business pays out and the profit on which it receives. In other words: Revenue total – total costs = Accounting profit
Economic profit is the difference between the total revenue – total cost and implicit costs (opportunity cost) = Economic profit. This type of profit helps to define if a company should go into business or leave the market.
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