Implicit Cost Analysis

Words: 1618
Pages: 7
Open Document
Introduction: Companies strive to improve and maximize profits in various ways. Some are successful while others are not very successful. The strategy that initially works for some companies, if not properly and effectively managed becomes their undoing. In this paper, we explain the difference between implicit and explicit costs and provided two examples of when an explicit cost is different from an implicit cost. Furthermore, this paper explores the difference between accounting and economic profit while giving two examples of when they differ. These examples led us in this paper to explain the difference between economies and diseconomies of scale. Finally, we provided examples of when an actual firm might benefit from economies of scale …show more content…
Implicit costs do not require a company or business to make direct expenses to actualize a production. This is because; the company already has the resources incurred so why using the resources, they are seen as implied in nature and therefore, does not involve a cash payment. Conversely, explicit costs involve direct costs that are actually incurred by a company to implement a production process. In explicit costs, a company directly bears the expenses or costs, but in implicit costs, a company makes use of the opportunity cost equal to the amount that it must sacrifice to use those factor of productions for which it already owns (Khan Academy, …show more content…
The first example would be an individual working in a company and earns $50, 000 per year and decided to start a personal company. The startup cost the company incurred total $70,000 but at the end of the first year, the company earns a profit of $90,000. The accounting profit of the company is $20,000 or $90,000 - $70,000. However, because the company owner could have made $50,000 per year in a different workplace, the company is regarded to have recorded an economic loss of $30,000 or $50,000 - $20,000. So the difference is that accounting profit considers the total profit of the business while economic profit looks at the opportunity costs. The second example of when they differ would be an individual who gave up a job of $20,000 monthly to start a lucrative coffee shop. While the business drew in the first year, its accounting and economic profit recorded a reasonable profit. However, two coffee shops came to the same environment and they became three coffee shops. The presence of the later coffee shops reduced the inflow of customers to the first coffee shop. By the end of the business season, the accounting profit remains while the economic profit has suffered a misfortune; therefore, the individual or company took a large opportunity cost. So the accounting profit may be high because it does not consider the opportunity cost; however, the economic profit will be low because it considers the
Show More

Related Documents: Implicit Cost Analysis

Super Project Case Analysis

way to evaluate the investment of a new product, Super Project. Our financial analysis team observed three alternative techniques to assess the project. We looked at the relevant cash flows as well as other information in General Foods’ financial statements to come up with the best technique. After viewing all possible evaluation techniques, we found that the fully allocated basis was best in analyzing the true cost of the proposed investment. The Super Project was analyzed on three options including…

Words 594 - Pages 3

Chapter 1 Profits Managers And Markets 1 Essay

money – Use marginal analysis • Learning managerial economics 1-2 Introduction Economics • The science of making decisions in the presence of scarce resources. – Resources are anything used to produce a good or service, or achieve a goal. – Decisions are important because scarcity implies…

Words 1199 - Pages 5

Managing Operations, Information, and Knowledge of Gate Gourmet Essay examples

technology for packing of red meats, fruits and vegetables. This helped to achieve the minimal spoilage of the input resources and lowers the costs. The company has established sophisticated machineries for this purpose (Modified Atmosphere Packaging). 4. Food Safety Checks and Assurance Systems The company voluntarily follows HACCP (Hazard Analysis Critical Control Points) to ensure food safety. The company inspects every vehicle that delivers the raw materials, check by digital…

Words 3090 - Pages 13

Convincing A Nation Built On War Not To Go To War

Convincing a nation built on war not to go to war: An analysis of how Barack Obama employs linguistic techniques to oppose the Iraq War and win the support of his audience and America. Introduction On the 11th of October 2002, President Bush was given congressional approval to use the armed forces of the United States against Iraq (CNN) with 65% of the public supporting the war (Olive 2008). This was in response to allegations that Iraq was supporting terrorist group Al Qaeda and was actively seeking…

Words 4447 - Pages 18

Macro & Micro Economics Essay

concepts and economic analysis to the problems of formulating rational managerial decision.” - Edwin Mansfield Managerial economics refers to the use of economic theory (microeconomics and macroeconomics) and the tools of analysis of decision science (mathematical economics and econometrics) to examine how an organization can achieve its aims and objectives most efficiently. . The most frequent applications of managerial economics techniques are as follows: • Risk analysis: Various models…

Words 2304 - Pages 10

Nur 641 Final Question Paper

Analysis of Examination Questions Mohsin Rasho Valparaiso University NUR 641 “I have neither given nor received, nor have I tolerated others' use of unauthorized aid.” Mohsin Rasho Objectives for the authentic, brain based, and deep learning concepts 1. Define authentic learning; brain based learning and deep learning concepts. 2. Differentiate the role of the faculty…

Words 1619 - Pages 7

Ch. 4 Product and Service Design Essay

some of the things that product and service design does. 1) Translates customer wants and needs into product and service requirements. (marketing, operations) 2) Develop new products and services. (marketing) 3) Formulate cost targets (accounting, finance, operations) 4) Document specifications 3. Give a few examples for each of these major reasons for design or redesign: Economic-…

Words 1761 - Pages 8

Essay Ford Pinto Case Review

Review #1: Ford Pinto 1.) FACTS • Ford was aware of gas tank defects on their Pinto model • Ford ignored the safety concerns, positing “safety doesn’t sell” (p. 66) • Ford based their decision off a cost-benefit analysis o Determined the “cost” of trunk alterations outweighed the “cost” of enhanced safety • There were over 40 incidents involving Pinto passengers dying or being severely maimed 2.) ETHICAL ISSUES • Is it morally right to sell a car with known, potentially fatal, defects…

Words 598 - Pages 3

Research Papers On Marketing

organizations 6. occurs in many settings Marketing Plan- specifies the marketing activities for a specific period of time. Marketing plan is broken into various components – how the product or service will be conceived or designed, how much it should cost, where and how it will be promoted, and how it will get to the consumer. Marketing is About Satisfying Customer Needs and Wants -Broadest terms= Marketing is the world of trade. -Narrow terms= marketplace can be segmented into groups of people…

Words 1275 - Pages 6

Strategic Management: Ikea Case Study Essay

strategy is not only about planning for future but also about confirming the validity of the hypothesis considered and implementing it successfully. Strategy formation may take various forms such as implicit, explicit or emergent. Implicit strategy is a strategy formed by intuitions of an individual. As per implicit strategists, strategic management is about reading the environment…

Words 3341 - Pages 14