Economic Profit and Accounting Profit

Opportunity cost is used to calculate different types of company profit.

• The most common type of profit analysts are familiar with is accounting profit. Accounting profit is the net income calculation often stipulated by Generally Accepted Accounting Principles (GAAP). Only explicit, real costs are subtracted from total revenue.
• Economic profit (and any other calculation above that considers opportunity cost) is strictly an internal value used for strategic decision-making. There are no regulatory bodies that govern public reporting of economic profit or opportunity cost.

Opportunity Cost = Return on best foregone option (FO) – return on chosen option (CO)

The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. company is faced with the following two mutually exclusive option...