Question

A firm had sales revenue of \(\$ 1\) million last year. It spent \(\$ 600,00\) on labor, \(\$ 150,000\) on capital and \(\$ 200,000\) on materials. What was the firm's accounting profit?

Short answer

The firm's accounting profit last year was \(\$50,000\).

Step-by-step solution

Calculate the Total Cost

Add the costs of labor, capital, and materials together to find the total cost. Total Cost = Labor + Capital + Materials Total Cost = \(\$ 600,000\) + \(\$ 150,000\) + \(\$ 200,000\)

Calculate the Accounting Profit

Subtract the total cost from the sales revenue to find the accounting profit. Accounting Profit = Sales Revenue - Total Cost Accounting Profit = \(\$ 1,000,000\) - \(\$ 600,000\) - \(\$ 150,000\) - \(\$ 200,000\) Now let's calculate the accounting profit: Total Cost = \(\$ 600,000\) + \(\$ 150,000\) + \(\$ 200,000\) Total Cost = \(\$ 950,000\) Accounting Profit = \(\$ 1,000,000\) - \(\$ 950,000\) Accounting Profit = \(\$ 50,000\) The firm's accounting profit last year was \(\$50,000\).

Key concepts

Sales Revenue

Understanding sales revenue is crucial for any business, as it is the income generated from selling goods or services before any expenses are deducted.
Sales revenue is often considered the top line or gross income of an organization. In this context, the firm reported sales revenue of \(\$ 1,000,000\) last year. This figure represents the total money earned from its business activities, specifically from the sale of its products or services.

Sales revenue is an important metric that helps assess a firm's performance within a specific period.
It provides insight into how effectively a company can sell its products. Though high revenue is positive, it's just one part of analyzing a firm's overall profitability and financial health.

• Sales Revenue Formula: Sales Price per Unit \(\times\) Number of Units Sold
• Represents the total earnings from core business operations.
• First step in calculating accounting profit.

Total Cost Calculation

Total cost consists of all the expenses a firm incurs to run its operations.
It usually includes costs like labor, capital, and materials, as highlighted in this exercise.
The total cost is an essential part of analyzing profitability since it affects how much of the revenue translates into profit.

In this scenario, to compute the total cost, you simply add all the individual costs:

• Labor: \(\\( 600,000\)
• Capital: \(\\) 150,000\)
• Materials: \(\\( 200,000\)

From there, the sum of these expenses forms the total cost.
Thus, \[\text{Total Cost} = \\) 600,000 + \\( 150,000 + \\) 200,000 = \$ 950,000\]
This total cost represents the overall outflow required to keep the business running.
Understanding each component of cost helps firms find areas for potential savings or improvements.

Profit Calculation

Profit calculation helps determine the financial success of a business.
There are different types of profit, but here we're focusing on accounting profit, which is the easiest to calculate and comprehend.
Accounting profit reflects the surplus after all operating expenses are subtracted from sales revenue.

The formula for accounting profit is straightforward:
\[\text{Accounting Profit} = \text{Sales Revenue} - \text{Total Cost}\]
In this exercise, the sales revenue was \(\\( 1,000,000\), and the total cost was \(\\) 950,000\).
So, the profit becomes:
\[\text{Accounting Profit} = \\( 1,000,000 - \\) 950,000 = \\( 50,000\]
This result shows that the firm made a profit of \(\\) 50,000\) last year.

Understanding accounting profit helps inform business decisions because it reveals how much is left over after accounting for costs.
By monitoring this, businesses can decide whether to cut costs, increase revenues, or make strategic changes.