Naila makes 1,000 pieces of pottery a year and sells them for Rs100 each. Raw materials cost Rs20,000. She has invested Rs100,000 in her factory and equipment: Rs50,000 of her own savings and Rs50,000 borrowed at 10 percent (she could also have lent her own money at 10 percent). She could earn Rs40,000 a year at a rival pottery factory. What is the accounting profit of her factory?
Correct answer C. Rs75,000
Explanation
Accounting profit deducts only explicit costs: Rs100,000 revenue minus Rs20,000 for materials and Rs5,000 interest on the loan gives Rs75,000.
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