Asked by Kibre Dubiso on Jun 08, 2024
Verified
Harvey quit his job at State University, where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building.The implicit costs of Harvey's firm in the first year were
A) $220,000.
B) $60,000.
C) $105,000.
D) $825,000.
Implicit Costs
refer to the opportunity costs that occur when a company uses internal resources that could have been used for another purpose but do not directly affect cash flow.
Entrepreneurial Talent
The specific skills, creativity, and innovation that individuals bring to starting and managing new ventures or businesses.
Forgone Interest
The potential interest earnings lost by choosing to invest capital in one option over an alternative that offers a higher return.
- Fathom the importance of opportunity costs and their linkage to implicit costs.
- Evaluate the consequences of varying revenues and expenditures on the profit margins of an enterprise.
Verified Answer
CR
Chrystal Ruth StoutJun 14, 2024
Final Answer :
B
Explanation :
Implicit costs are the opportunity costs of using resources owned by the firm for its own use rather than selling those resources. For Harvey, these include his forgone salary of $45,000, forgone entrepreneurial income of $5,000, and the forgone interest from the bonds of $10,000 (10% of $100,000). Adding these together gives $45,000 + $5,000 + $10,000 = $60,000.
Learning Objectives
- Fathom the importance of opportunity costs and their linkage to implicit costs.
- Evaluate the consequences of varying revenues and expenditures on the profit margins of an enterprise.