Answer (D) is correct . Explicit costs are those requiring actual cash disbursements. For this reason, they are sometimes called out-of-pocket or outlay costs. Explicit costs are accounting costs, that is, they are recognized in a concern’s formal accounting records. This firm’s explicit costs total $275,000, consisting of cost of sales, selling expenses, and general and administrative expenses. Implicit costs are those costs not recognized in a concern’s formal accounting records. Implicit costs are opportunity costs, i.e., the maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative. This firm’s implicit costs total $35,000, consisting of forgone interest and forgone entrepreneurial income. Accounting profits are earned when the (book) income of an organization exceeds the (book) expenses. This firm’s accounting profit is $325,000 ($600,000 – $275,000). Economic profits are a significantly higher hurdle. They are not earned until the organization’s income exceeds not only costs as recorded in the accounting records, but the firm’s implicit costs as well. Economic profit is also called pure profit. This firm’s economic profit is thus $290,000 ($600,000 – $275,000 – $35,000).
Answer (A) is incorrect because This amount is the gross margin.
Answer (B) is incorrect because This amount is the accounting profit.
Answer (C) is incorrect because Failing to recognize the forgone entrepreneurial income as an implicit cost results in $305,000.
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