Question

A business entrepreneur has recently leased a small herbicide production factory. The production facility rent costs him $180 per day. In addition, he must pay $85 for the lease on conveyor line, $48 for maintenance costs, $76 for utilities, $52 for interest on the loans used to maintain current operations, $64 for business insurance, $35 for property taxes, and those daily costs must be paid regardless whether the factory is operating or not.

There are two major components required to produce a single unit of output, i.e. a large reservoir and the chemical solution, which cost $16 and $14 per unit respectively. Business owner cannot maintain production process by himself, so he needs to hire workers to operate conveyor line and keep production process intact. Prevailing hourly market wage for the type of workers needed for this job is $20 and a typical workday lasts 8 hours.

Based on the above information, calculate the firm’s yearly accounting and economic profits at daily output rate of 135 units, which requires 7.5 units of labor to produce, given constant market price of $48 throughout the year, the fact that the firm’s owner fully paid off the conveyor line at the end of previous year and the fact that the firm was also relieved by the local government from paying property taxes during next year. In addition, assume that the firm carries $180,000 daily inventory, the annual market interest rate is 5% per year and there are 300 workdays in a year. Also known is the fact that business owner was a former executive at Monsanto, where his salary with the additional bonuses was $278,000 per year.

Annual Total Revenue =

Daily Explicit Costs:

Fixed Costs (FC) =

Labor Costs (L) =

Material Costs (M) =

Variable Costs (VC) =

Total Costs (TC) =

Total Yearly Explicit Costs =

Implicit Costs (list them):

Total Yearly Implicit Costs =

Yearly Accounting Profits =

Yearly Economic Profits =

Answer 1