How to calculate total accounting and economic profit from simple business example:
Example Accounting Problem:
An entrepreneur currently has an annual salary of $600,000 and wants to start a business on his own. The persons estimates the total of operating the new business will be about $250,000 per year.The potential revenue is estimated as $800,000 per year.
1. Calculate total accounting profit.
2. calculate total economic profit.
Accounting Answers:
1. Calculate total accounting profit. 800,000 - 250,000 = 550,000
2. Calculate total economic profit. 550,000 - 600,000 = -50,000
After looking at the total economic profit, the entrepreneur would be better staying with his current job if money is all the he cares about.
Tuesday, April 7, 2009
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