Suggested Solutions for Exercises Chapter 1/1: Eco556

Q6 Apr 02
Encik Zulkifly has a choice either to continue employment as a teacher or earning a
salary of RM50,000 per year or to start his own business retail business. Given below are
the estimated monthly revenue and costs if he starts his business:
Revenue RM3,500
Cost of material RM850
Staff salary RM625
Rental RM1000

The amount of capital required to start the business is estimated to be RM120,000 of

which half would be drawn from Encik Zulkifly’s savings account in the bank and the
balance would be borrowed from Bank Pembangunan Bhd. The current interest rate on
savings is 4% and the interest rate on loans is 8%.

a. Distinguish between economic profit and accounting profit.

b. Compute the accounting profit.
c. Compute the economic profit.
d. Would you advise Zulkifly to quit his job employment as a teacher
to start his own business? Why?

a)Distinguish between economic profit and accounting profit.

Answer
Accounting profit is total revenue minus total cost which is only the explicit cost;
whereby economic profit is total revenue minus total cost which consists of explicit
cost-plus implicit cost.

b) Compute the accounting profit.

c) Compute the economic profit.
d) Would you advise Zulkifly to quit his job as a teacher to start his
own business? Why?

Answer
Total Revenue RM3,500 x12 =42,000 42,000
Explicit cost:
Cost of materials RM850 ×12 = 10,200
Staff salary RM625×12 = 7,500
Rental RM1,000×12 =12,000
Int. on bank loans RM60,000@ 8% = 4,800

Explicit Cost = RM34,500 (34,500)

b. Accounting profit 7,500

Implicit cost:
Foregone Wages 50,000
Forgone Interest on savings RM60,000@ 4% = 2,400  
52,400 (52,400)

c. Economic profit (44,900)

d. Encik Zulkifly shouldn’t quit his job as a teacher to start his own business because
his future business is economically unprofitable @since econ profit is equal or
less than zero.
Q3 Apr 01
Rais manages a laundry for someone else and earns RM30,000 per year. He decides to
open his own laundry. Revenue during the first year of operation is RM100,000 and
expenses are RM35,000 for salaries, RM10,000 for supplies, RM8,000 for rent, RM2,000
for utilities and RM5,000 for interest on bank loan. Calculate:
a) Explicit cost
b) Implicit cost
c) Accounting profit
d) Economic profit
e) Indicate whether the laundry firm should remain open.

Answer
a. Salaries 35,000
Supplies 10,000
Rent 8,000
Utilities 2,000
Interest on bank loan 5,000  
Explicit cost 60,000.00

b. Foregone Wages 30,000.00  

Implicit cost 30,000.00

c. Revenue 100,000.00
Less:explicit cost 60,000.00
Accounting profit 40,000.00
Less:implicit cost 30,000.00
d. Economic profit 10,000.00

e. Rais should open his own laundry firm.

Solutions Exercises Chapter 1/1:Eco556/558