I. PROBLEM SOLVING. Solve for what is asked for.

Use the space provided for your answer and

complete solution.

1. Lee, a programmer, earned P350,000 in 2010, but in 2011, he began to manufacture

computer monitors. After one year, he submitted the following data to his accountant.

 He stopped renting out his cottage for P35,000 a year and used it as his factory.
 The market value of the cottage increased from P700,000 to 710,000.
 He spent P50,000 on materials, phone, utilities, etc.
 He leased machines for P100,000 a year.
 He paid P150,000 in wages.
 He used P100,000 from his savings account, which pays five 5% interest a year.
 He borrowed P400,000 at 10% a year from the bank.
 He sold P1,600,000 worth of monitors.
 Normal profit is P250,000 a year.

Compute for the following:

 Lee’s explicit costs

 Lee’s implicit costs
 Lee’s economic profit

Answer:

Lee’s explicit costs

 Materials, phone, utilities, etc. = P 50,000
 Wages paid = P 150,000
 Barrowed money = P 40,000 (10% of 400,000)

50,000+150,000+40,000 = P 240,000

Total explicit costs = P 240,000

Lee’s implicit costs

 Programmer earned = P 350,000
 Rent = P 35,000
 Interest of payment = P 5,000 (5% of 100,000)
 Normal profit = P 250,000
 Increased market value of the cottage = P 710,000-7000
 350,000+35,000+5,000+250,000-10,000 = P 630,000

Total implicit costs = P 630,000

Lee’s economic profit

 Sold worth of monitor = P 1,600,000

 Total explicit costs = P 240,000
 Total implicit costs = P 630,000

= P 1,6000,000-(240,000+630,000)
= P 1,6000,000-870,000
= P 730,000