Explicit and Implicit Cost
Economic profit is explained by business opportunity cost. The opportunity cost is associated with the decision that includes both explicit and implicit costs. The unique aspect about opportunity it regards the cost associated with making alternative decision. The cost associated with an alternative are often refer implicit costs. The accounting cost of making a decision is called the explicit cost (McEachern, 2008).
While the accounting costs are fairly simple to calculate, implicit costs are not as easy. Measuring the cost of best foregone alternative can be easily anticipated. Considering the Amos McCoy invests in 100 acres earn $100, Amos McCoy has an alternative investment option, where Amos McCoy could earn $200 per acre. Based on economic principles in regard to implicit and explicit, it is evident that Amos McCoy currently makes no economic benefit.
In the first case, where Amos McCoy earns $100 from 100 acres represents a business expense, that can easily identified and accounted for as an explicit cost. The cost incurred reflects clear, obvious outflows from a business that reduces its bottom-line profitability (McEachern, 2008). At the same time explicit cost contrast with less-tangible expenses such as goodwill amortization, which does not present a clear cut regarding their effects on business, in this case Amos McCoy investment.
In conclusion, it crucial to note that McCoy’s business expenses that regard explicit costs such as wage expenses, land lease costs among other related cost involved in production in order for the investment to earn the $100 were not identified, this makes it difficult to know whether the business earn an economic profit. However, with the alternative information given, it is easy to identify the source of cash outflow and investment activities, thus, identifying the attribute related profit or loss. McCoy’s farm investment can earn profits through the proposed option where, 1acre has the potential to earn McCoy $200. It is therefore, evident that McCoy’s current is not making an economic profit.
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