Chapter 3 Flashcards
What are additional costs that don’t appear on the financial statements?
Implicit costs
What is an example of an implicit cost?
Opportunity cost of capital
What is the cost that creditors charge for use of their capital?
Interest
Negative Economic Profit means?
The company is earning less than shareholders expected
Economic Profit recognizes both ____ and ____.
Explicit and implicit costs of capital
When does the hidden cost fallacy occur?
It occurs when you ignore relevant costs, those costs that do vary with the consequence of your decision
When does the sunk or fixed cost fallacy occur?
Occurs when you take account of irrelevant costs or benefits
What are two common causes of the sunk-cost fallacy?
Overhead and Depreciation
Why should Overhead not influence business decisions?
Overhead doesn’t vary with most decisions, so it should not influence them
______ does not necessarily correspond to economic profit.
Accounting profit
