Find out (a) explicit cost, and (b) implicit cost from the following:
(i) Investment in fixed assets
(ii) Borrowings at $12 %$ interest per annum
(iii) Wages paid during the year
(iv) Annual rental value of the owner's factory building
(v) Annual depreciation
(vi) Estimated annual value of the management services of the owner.

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Solution

(a) Explicit Cost $=$ Interest on borrowing $+$ Wages paid during the year $+$ Annual depreciation
$= R s . 180 t h o u s a n d + R s . 120 t h o u s a n d + R s . 100 t h o u s a n d$
$= R s . 400 t h o u s a n d$
(b) $^{*}$ Implicit Cost $=$ Imputed interest on own investment $+$ Annual rental value $+$ Estimated annual value of the management services
$= R s . 60 t h o u s a n d + R s . 180 t h o u s a n d + R s . 240 t h o u s a n d$
$= R s . 480 t h o u s a n d$
(a) Explicit Cost $= R s . 400 t h o u s a n d$ .
(b) Implicit Cost $= R s . 480 t h o u s a n d$ .
$^{a s t}$ We assume that the investor has withdrawn $R s . 500$ thousand $(R s . 2, 000 t h o u s a n d - R s . 1, 500 t h o u s a n d)$ from his bank thereby losing $12$ % interest (i.e., $12$ % of $R s . 500 t h o u s a n d = R s . 60 t h o u s a n d)$ .

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