Consider the revenues and costs in 2013 for Spruce Decor Inc., an Alberta-based furniture company entirely owned by Mr. Harold Buford.
Furniture Sales…………………….. $645,000
Catalogue Sales……………………. $12,000
Labour Costs………………………. $ 325,000
Materials Costs…………………….. $157,000
Advertising Costs………………….. $28,000
Debt-Service Costs…………………. $32,000
a. What would accountants determine Spruce Decor's profits to be in 2013?
b. Suppose Mr. Buford has $400 000 of capital invested in Spruce Decor. Also suppose that equally risky enterprises earn a 16 percent rate of return on capital. What is the opportunity cost for Mr. Buford's capital?
c. What are the economic profits for Spruce Decor in 2013?
d. If Spruce Decor's economic profits were typical of furniture makers in 2013, what would you expect to happen in this industry? Explain.