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Running head: AMERICAN AIRLINE PURCHASING LAND FOR DEVELOPMENT

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AMERICAN AIRLINE PURCHASING LAND FOR DEVELOPMENT 2

American airline purchasing land for development

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Economic profit=total revenue received – (implicit +explicit cost)

E. P=$2.5million – ($375000+ $1720000)

$2.5million -$2.095million=$405000

Economic profit=$405000

The opportunity cost is $0.405million from the $2.5 million from the investor subtracted $2.095 combined from the cost of land, labour and raw materials. ($375000 +$1720000). The airways should accept the proposal since it falls under their rules and the policy they have in place (Introduction to business calculations through assignments, 2017). The piece of the land is far more below to what they intended to purchase it. They will purchase the land at $375000, and it falls under the category of below the $850000. This makes it possible to again be able to contract because the budget which only allows development if the land value is below $850000.the cost of the material and labour is also below what is offered by the investor who is ready to give $2.5 million. The company is likely to accrue profits by the fact that the cost of land and the cost of labour and raw materials will be captured by the investors and the company will also have some cash as surplus. The cost of land is $37500, and the cost of labour and raw material would total up to $1720000 hence when added it will add up to the total cost of $2.095million. The company will have cash in excess of $405000.the company can accept the proposal and continue with the construction of the training ground. There can also be available space for the usage in other activities which are commercially based on legal mitigation (Business finance, 2010). The economic profits will be realized from the savings by having the land at low cost, and also the spaces got for commercial usage, and the spaces can be rented.

References

Business finance. (2010). Rex Bookstore.

Introduction to business calculations through assignments. (2017). Macmillan International Higher Education.