An economic profit is the difference between the revenue received from the sale of an output and the costs of all inputs used and any opportunity costs.
Economic profit is important because it is used as an indicator of how profitable company projects are and it therefore serves as a reflection of management performance.
Formula to calculate economic profit.
An implicit cost represents an opportunity cost that arises when a company uses internal resources toward a project without any explicit compensation for the utilization of resources.
Explicit costs are normal business costs that appear in the general ledger and directly affect a company’s profitability. Examples include wages, raw materials, and other direct costs.
A company has a total revenue of $200,000 and explicit costs of $150,000. Calculate the economic profit of the company if the implicit costs are $30,000.
Therefore, the company earned economic profit of $20,000.