Question

The Lynx Manufacturing Company produces components used in electronic toys. In fiscal year 2017, Lynx earned an accounting profit of $3 million. However, Lynx's production facilities might have also been used to produce components for mobile phones, which would have generated $2 million in revenues and saved the company $500,000 in production costs. Which of the following statements is true?
A) Lynx earned an economic profit of $5.5 million.
B) Lynx earned an economic profit of $500,000.
C) Lynx suffered an economic loss of $500,000.
D) Lynx suffered an economic loss of $2.5 million.

Answer 1

Answer:

A) = $5.5 million

Explanation:

Accounting profit is the difference between revenue from from production or service activities and the expenditures incurred.

On the other hand, economic profit includes accounting profit plus opportunity cost. Opportunity cost is the value of the benefits sacrificed in favour of  a decision.

For example, for Lynx, the lost revenue and savings of 2 million and 500,000 respectively are examples of benefit lost in favour of the decision to produce components.

Economic profit = Accounting profit + opportunity cost

= $ 3 million + $2.5 million

= $5.5 million

Statement A is true

A) Lynx earned an economic profit of $5.5 million.