Question

In 2009, Vito opened Vito’s Italian Restaurant with his wife, Catherine. Before they opened Vito’s, Vito managed L’Italia Restaurant, and earned $45,000 per year. Catherine had just graduated from JMU, and turned down a job offer from PWC for $60,000 per year. To open the restaurant they used $200,000 of their own savings, which earned 5% interest per year. In additional, they borrowed $150,000 from a local bank. The interest rate on the loan was 10%. a(3). At the end of the first year of business, Vito’s had the following revenues and costs: Food sales $400,000 Beverage sales $350,000 Labour costs $380,000 Food costs $160,000 Rent $60,000 Advertising $30,000 Suppose Vito and Catherine ask you to determine whether or not they earned a profit. How would you respond as an accountant and as an economist?

Answer 1

ANS

When we have to respond as an accountant then we will not consider the oppurtunity costs which is the sacrifice of their salary but when we are responding as an economist then we have to take in account the oppurtunity costs and then show the actual profits.

As an accountant

Revenue = Food sales $400,000+ Beverage sales $350,000

Costs = Labour costs $380,000+ Food costs $160,000+ Rent $60,000 +Advertising $30,000 + 10% interest

Profit = Revenue - Cost = 750000 - 645000 = 105000

As an accountant there will be profit of 1,05,000

As an economist

Revenue = Food sales $400,000+ Beverage sales $350,000

Costs = Labour costs $380,000+ Food costs $160,000+ Rent $60,000 +Advertising $30,000 + 10% interest+ yearly salary($60,000+ $45000) + interest from savings $10000

Profit = Revenue - Cost = 750000 - 760000 = - 10000 = loss of 10000

As an economist there will be a loss of $10000 because of effect of oppurtunity cost.