The accounting profit is the difference between total revenue and total cost excluding the economic cost (opportunity cost) of owner-supplied resources such as time and capital. On the other hand, In the economic cost, we include the opportunity cost in our calculations.
Accounting profit = 5,000,000 - 4,500,000 - 40,000 - 400,000 - 50,000 = $10,000
Economic profit = 5,000,000 - 4,500,000 - 60,000 - 400,000 - 30,000 - 4,000,000*10% = -$390,000
Howard Bowen is a large-scale cotton farmer. The land and machinery he owns has a current market value of $4 million. Bowen owes his local bank $3 million. Last year, Bowen sold $5 million worth of cotton. His variable operating costs were $4.5 million; accounting depreciation was $40,000, although the actual decline in value of Bowen’s machinery was $60,000 last year. Bowen paid himself a salary of $50,000, which is not considered part of his variable operating costs. Interest on his bank loan was $400,000. If Bowen worked for another farmer or a local manufacturer, his annual income would be about $30,000. Bowen can invest any funds that would be derived, if the farm sold, to earn 10 percent annually. (Ignore taxes.)