CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

A company compiles the following information:

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).

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)
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