Pravin Merchant, a chartered accountant, work for a well known accounting firm and earns Rs. 6,00,000 per year. He is planning to set up his own practice. He estimates that renting an office would cost him Rs. 1,00,000 per year, hiring an accounts assistant would cost Rs. 2,00,000 per year, renting the required office equipment would cost Rs. 1,50,000 per year, and purchasing the required supplies, paying for electricity, telephone, and other expenses would cost him another Rs. 50,000 per year. He estimated that his total revenues for the year would be Rs. 15,00,000. He is indifferent between keeping his jobs with the large firm and opening his own office.
l ) What are Pravin Merchant’s accounting or explicit costs of
starting his own practice?
2) (a) What are his economic costs?
(b) What will be his accounting profit and economic profit?
Answers
Answer:
Explanation: 1) Explicit costs are the costs incurred to hire the services of factors of production. The payment is made to outsiders either in cash or credit
Pravin Merchant's Explicit costs of starting his own practice
i. Cost of renting an office = Rs.1,00,000
ii. Cost oh hiring an accounts assistant= Rs.2,00,000
iii)Cost of renting Office Equipments= Rs. 1,50,000
iv)Other expenses= Rs.50,000
Total Excplicit Cost = Rs 5,00,000
2) (a) Economic costs include accounting costs and also include implicit costs, they can be calculated by subtracting implicit costs from explicit costs
Thus Pravin's economic cost would be
(where 6,00,000 that is the salary earned by him is the implicit cost)
(b) Accounting Profit= Total Revenue- Accounting Costs
Economic Profit= Total Revenue- (Explicit+Implicit Expenses)
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