Brian lives in Philadelphia and runs a business that sells boats. In an average year, he receives $722,000 from selling boats. Of this sales revenue, he must pay the manufacturer a wholesale cost of $422,000; he also pays wages and utility bills totaling $268,000. He owns his showroom; if he chooses to rent it out, he will receive $2,000 in rent per year. Assume that the value of this showroom does not depreciate over the year. Also, if Brian does not operate this boat business, he can work as a paralegal and receive an annual salary of $21,000 with no additional monetary costs. No other costs are incurred in running this boat business.

Identify each of Brian's costs in the following table as either an implicit cost or an explicit cost of selling boats.

(a) The rental income Brian could receive if he chose to rent out his showroom
(b) The wages and utility bills that Brian pays
(c) The salary Brian could earn if he worked as a paralegal
(d) The wholesale cost for the boats that Brian pays the manufacturer

a) The rental income Brian could receive if he chose to rent out his showroom  - implicit cost

(b) The wages and utility bills that Brian pays  - explicit cost

(c) The salary Brian could earn if he worked as a paralegal  - implicit cost

(d) The wholesale cost for the boats that Brian pays the manufacturer - explicit cost

Explanation:

Explicit Costs are easy to identify, they are recorded in the financial statements, and are known as accounting costs. It is clearly an outflow of money from a business. Examples are the cost of buying inventory or paying contractors.

Implicit Costs can be the opportunity cost of running a business. In the above question, the salary Brian loses because he is not working as a paralegal is an opportunity cost. So is the rental income Brian could receive if he chose to rent out his showroom

. They are both implicit costs.

Implicit Costs cannot be recorded as accounting costs. Other examples of implicit costs are expenses made in the past such as the cost of Brian's showroom.

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