- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 2. Economic Profit vs. Accounting Profit
CFA Practice Question
A company compiles the following information:
Value of buildings and machinery
- At the beginning of the year: $300,000
- At the end of the year: $280,000
Cost of raw materials: $100,000
Wages paid during the year: $50,000
Normal profit for the year: $40,000
Total revenue: $300,000
Value of buildings and machinery
- At the beginning of the year: $300,000
- At the end of the year: $280,000
Cost of raw materials: $100,000
Wages paid during the year: $50,000
Normal profit for the year: $40,000
The company's economic profit is closest to ______.
A. $90,000
B. $100,000
C. $110,000
Explanation: Economic profit is equal to total revenue minus total costs, both explicit and implicit costs (including normal profit).
Economic profit = Total revenue - Total costs = 300,000 - 210,000 = 90,000
Total costs = 100,000 + 50,000 + 40,000 + (300,000 - 280,000) = 210,000
Economic profit = Total revenue - Total costs = 300,000 - 210,000 = 90,000
User Contributed Comments 5
User | Comment |
---|---|
colimp | i'm sorry could anyone explain why 40(normal profit ) is added in costs?! |
schweitzdm | I suspect it's counted as an opportunity cost... but not 100% sure. |
wdonayre | From investopedia it specified: Normal profit is an economic condition occurring when the difference between a firm's total revenue and total cost is equal to zero. Simply put, normal profit is the minimum level of profit needed for a company to remain competitive in the market. |
alles | normal profit is the accounting profit that makes economic profit equal to 0. So, if accounting profit was 40, economic profit would be 0. |
renataa | I think the easiest way to remember is treat normal profit as the opportunity cost: 40,000 of normal profit could be earned elsewhere if firm wasn't engaging in this business (owners could earn more in salaries if working instead of running the business) |