Practice question · Multiple choice
A firm owns its warehouse outright and books zero rent, concluding the storage operation is profitable. What has the accounting missed?
Hints
- Ask what the firm gives up by using the warehouse itself.
- No cash moves. Does that make the cost zero?
Show the answer
B. The implicit cost of the warehouse, the forgone rent
Why
The next-best use of the building is renting it out, and refusing that rent is a payment made in forgone income rather than cash. Economic profit subtracts implicit costs and accounting profit does not, which is why a business can look profitable on paper and be destroying value.
Practise Opportunity Cost
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