To measure performance, economic profit appears superior to accounting profit because:
A)It requires a more demanding performance discipline for managers
B)It improves the allocation of capital across businesses
C)It increases benchmarking and competition within an industry
D)Answers a and b

Question

Quizplus · Accepted Answer

Economic profit takes into account the opportunity cost of resources and capital, which requires managers to make more rigorous and efficient decisions to maximize profits. This, in turn, improves the allocation of capital across businesses as only the most profitable ones receive it. Additionally, economic profit provides a more comprehensive measure of performance, fostering benchmarking and competition within an industry. Therefore, a and b are both correct explanations of why economic profit appears superior to accounting profit.

To Measure Performance, Economic Profit Appears Superior to Accounting Profit