The economic profit calculator affords the user the chance to view the performance of the business and the associated costs over a set period of time. This time could be a single year, for example, or it could be a period that comprises several years. With this easy-to-use tool, you will be able to estimate your profit and make the right decisions.
This article will look at the importance of using an economic profit calculator in business. You can also learn how to apply the formula for economic profit and optimize performance based on the outputs. That will eventually help you make a better business decision in a certain situation. So, let’s check it out!
Economic Profit – What Does It Imply?
There is a lot of noise about economic profit all over the internet. But in reality, not many people know what it is. So what is economic profit and why is this concept important for business? In this section, we will answer these questions and also explain why economic profit matters for every company or business.
When you turn a profit, you are actually making an economic profit which is the amount that you are earning above and beyond the break-even point. Every company should look to achieve this while optimizing its performance at the same time.
That being said, economic profit is the difference between the total revenue and total cost. This is what a business earns after subtracting all of its costs from its revenues. The term is usually used in accounting or business to describe a company’s financial performance. There are a number of factors that affect economic profit, including:
- Costs
- Revenue
- Investment
- Strategy
- Operational efficiency, and
- Risks.
Here, we will focus on the total revenue and costs (particularly explicit and implicit costs) because these are the two key elements of economic profit.
Cost
The cost of the inputs used to produce a product is called the “cost of production.” The difference between the cost of production and the price of that product sold has two parts. First, there is the “normal profit” which is the part of the price that comes back to the company as profit. Second, there is a “quasi-rent” or “economic rent.” This second part is extra profit that comes from the productive economic power of the firm in question.
When it comes to economic profit, you should consider explicit and implicit costs in particular. These costs are all implicit costs that will have a significant impact on the company’s bottom line. They include recruiting fees, advertising fees, interviewing fees, etc.
Whether your company provides a wide range of cleaning services to offices and commercial properties or you’re running an ice-cream business, you should know what these costs mean. Read on to find out!
- Explicit cost: The explicit cost is the cost that is directly calculated. For example, a company might charge $10 per hour for an employee. The explicit cost of this employee would be $10 per hour.
- Implicit cost: The implicit cost is a cost that cannot be easily calculated, but can have a huge impact on the company’s bottom line. For example, if an employee leaves and needs to be replaced, there are many costs associated with hiring and training a new person to do the job.
Ultimately, you need to take into consideration the total cost of your company or business. As its name implies, it is the total of all costs, both implicit and explicit. You actually need to consider the total opportunity cost which includes implicit and explicit costs. The economic profit represents the portion of your revenue that’s supposed to be greater than the total cost at all times.
Revenue
The total revenue of a company is the total amount of money that the company has earned in a given period. In other words, it is the total amount of money generated by a company during a certain period of time. A company’s total revenue is calculated by multiplying its net sales by its gross profit margin. It can also be calculated by taking the net income and multiplying it by the number of shares outstanding.
If you want to calculate the total revenue of a company, we recommend using the formula below:
Total revenue = Price * Quantity, or
Total Revenue = Number of Units Sold * Cost Per Unit
Now that you know you know more about economic profit, revenue, and associated costs, it is time to discover the economic profit formula. Are you ready? Continue scrolling to find out more!
How Economic Profit Is Calculated?
When calculating economic profit, you need to use the following formula:
Economic profit = total revenue – (explicit costs + implicit costs)
It is derived from this formula: Economic profit = total revenue – total opportunity cost
We are going to provide an example to help you understand how this calculation can be used. Take a look below!
Example:
- Total Revenue: $100,000
- Explicit Costs: $40,000
- Implicit Costs: $20,000
Economic profit = 100,000 – (40,000 + 20,000)
Economic profit = 100,000 – 60,000
Economic profit = $40,000
What Is the Difference Between Economic Profit and Accounting Profit?
Accounting profit is the difference between revenue and expenses. Revenue is the money that a company has earned from its products or services, while expenses are all of the costs that it has incurred to produce those products or provide those services.
The net result is accounting profit, which can be either a positive number (profit) or a negative number (loss). If revenues exceed expenses, then accounting profit will be positive. On the other hand, if expenses exceed revenues, then accounting profit will be negative.
So, when talking about accounting profit, we think of the total revenue that is left after subtracting a company’s explicit costs. As for the economic profit, it is required to consider the total opportunity cost, which includes the implicit costs (aside from the explicit costs) of a company without a cash outlay. This makes the difference between economic and accounting profit.