You have been working for home-building companies for a number of years. You enjoy construction work, and now you want to start your own home-building company that you will run yourself.
You quit your previous job that had been paying $ 40,000 per year. You have $ 40,000 in your savings account that you withdraw to start this company. The savings account had been paying you 5% interest. Because the $ 40,000 from your savings is not enough to start the company, you also borrow $ 2,300,000 from the bank. (The bank manager is willing to loan you such a large amount because he knows of your reputation and experience in the home-building industry.) You use the money to hire workers and buy the tools, machinery, and raw materials with which you will build houses.
The cost per worker is $ 20,000 per year. In your first year, you plan to hire 48 workers to do the construction work, which means that the annual labor cost of your company will be $ 960,000 (48 x $ 20,000). With 48 workers, your company can build seven houses.
You must also buy raw materials–land, wood, nails, plasterboard, and so forth. Each house requires $ 20,000 worth of raw materials. The cost of raw materials for seven houses is $ 140,000 (7 x $ 20,000).
Finally, the bank charges 6% interest on your loan. The interest cost is $ 138,000 (6% of $ 2,300,000).
9.3. You sell seven homes during the year at a price of $ 200,000 per home. Therefore, your company receives total revenue of $ 1,400,000 (7 x $ 200,000). What are the economic profits for your construction company?
A. $ 1,400,000
B. $ 120,000
C. $ 1,358,000
D. $ 162,000
E. $ 0