Detailed Answer
Answer (B) is correct. An accounting profit is the excess of revenues over explicit costs, in this case ($250,000 revenue) – ($120,000 salaries + $20,000 rent + $9,000 furniture + $9,000 supplies + $80,000 insurance + $7,000 utilities) = $5,000. An economic
profit is a significantly higher hurdle. It is not earned until the organization’s income exceeds not only costs as recorded in the accounting records, but the firm’s implicit costs as well. In this case, the most important implicit costs are Jennilyn’s forgone salary ($40,000) and the interest she could have earned by simply investing the inheritance instead of plowing it into the business ($100,000 × 6%). Since the combined implicit costs of $46,000 exceed the accounting profit of $5,000, Jennilyn would incur an accounting profit but an economic loss.