Question

CenTer Realty is a recently founded commercial and residential real estate company. CenTer grossed $3,000,000 in revenues last year, while incurring $1,000,000 in operating expenses and $300,000 in income taxes. CenTer Realty owned and occupied an office building in downtown Kansas City. The building could have been leased to other businesses for $500,000 in lease income last year. The owner of CenTer Realty invested $4,000,000 of his own money that could have earned a 10 percent rate of return on funds invested elsewhere. He also left a job as a realtor, where he earned $200,000 the previous year. Q 1 Question 1 Last year, CenTer Realty’s total explicit costs of using market-supplied resources are $. Q 2 Question 2 CenTer’s total implicit costs of using owner-supplied resources equals $ last year. Q 3 Question 3 CenTer’s accounting profit was $ Q 4 Question 4 Economic profit last year was

Answer 1

Question 1

Calculate the CenTer Reality's total explicit cost -

Total explicit cost = Operating expenses + Income taxes

Total explicit cost = $1,000,000 + $300,000

Total explicit cost = $1,300,000

The CenTer Reality's total explicit costs are $1,300,000.

Question 2

Implicit costs are as follows -

Foregone lease income = $500,000

Foregone interest = $4,000,000 * 0.10 = $400,000

Foregone salary = $200,000

Calculate the CenTer Reality's total implicit cost -

Total implicit cost = Foregone lease income + Foregone interest + Foregone salary

Total implicit cost = $500,000 + $400,000 + $200,000 = $1,100,000

The CenTer Reality's total implicit costs are $1,100,000

Question 3

Total revenue = $3,000,000

Total explicit costs = $1,300,000

Calculate the accounting profit of CenTer Reality -

Accounting profit = Total revenue - Total explicit cost = $3,000,000 - $1,300,000 = $1,700,000

The CenTer Reality's accounting profit is $1,700,000

Question 4

Accounting profit = $1,700,000

Total implicit cost = $1,100,000

Calculate the economic profit of CenTer Reality -

Economic profit = Accounting profit - Total implicit cost

Economic profit = $1,700,000 - $1,100,000 = $600,000

The CenTer Reality's economic profit is $600,000