Naila runs a small pottery business producing 1,000 pottery items annually, each sold for Rs 100. The raw materials cost her Rs 20,000 to produce these items. She has invested Rs 100,000 in her factory and equipment—half from her own savings and half borrowed at an interest rate of 10%. (Assume she could have alternatively invested her savings elsewhere at 10%.) Additionally, Naila has the option to work at another pottery factory earning Rs 40,000 per year. What is the accounting profit of Naila's pottery business?
Explanation
Accounting profit is calculated by subtracting explicit costs from total revenue. Here, total revenue is Rs 100,000 (1,000 pieces × Rs 100). Explicit costs include Rs 20,000 for raw materials and Rs 5,000 interest on the borrowed Rs 50,000 at 10%. Therefore, accounting profit = Rs 100,000 - (Rs 20,000 + Rs 5,000) = Rs 75,000.