Question

You own and operate a hamburger. Each year, you receive revenue of $400,000 from your hamburger and associated food sales, and it costs you $200,000 for the food. In addition, you pay $80,000 for electricity, taxes, and other expenses per year. Instead of running the hamburger, you could become a management consultant and receive a yearly salary of $100,000. A large clothing retail chain wants to expand and offers to rent the store from you for $40,000 per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store?

Answer 1

You own and operate a hamburger. Each year, you receive revenue of $400,000 from your hamburger and associated food sales, and it costs you $200,000 for the food. In addition, you pay $80,000 for electricity, taxes, and other expenses per year.

Your yearly accounting profit will be as follows

Total Revenue                                      $400,000

Less

Hamburger costs                                  $200,000

Electricity, taxes, and other expenses     $80,000

Accounting Profit                                 $120,000

Instead of running the hamburger, you could become a management consultant and receive a yearly salary of $100,000. A large clothing retail chain wants to expand and offers to rent the store from you for $40,000 per year. How do you explain to your friends that despite making a profit, it is too costly for you to continue running your store?

Opportunity cost of becoming management consultant

Accounting Profit                                           $120,000

Less

Opportunity cost of your time                         $100,000

Opportunity cost of not renting the store                  $40,000

Economic Loss                                               (-)$20,000

Although you make an accounting profit each year, you would be better off renting the store to the large chain and becoming management consultant yourself, since your opportunity cost of continuing to run your own store is too high.