Accounting profit and economic profit in a business facility

An applied study on the National Trailer Company

Abstract

This paper deals with the economic entity's Profit. Its focal point is the Accounting and the Economic approaches as two indicators to guide the decision-making when prioritizing the alternatives. The idea of this research has stemmed from a wide revision of the available literature, which showed that the conflict between these indicators is possible; hence, a question was raised about which of the two indicators the decision-maker should follow in such a case. The discussions and the conducted analyses in this research showed that the two indicators are in a conflict when using "profit maximization" as a criterion to compare the two alternatives in hand, while the two indicators were in agreement when the comparison was made on the bases of "Shareholder Wealth Maximization "where the economic profit indicator turned to support the opponent alternative to which it has supported under "Profit Maximization" criterion. This shift indicates a state of internal contradiction within the measure itself. A deeper examination and investigation into the point disclosed that this discrepancy is attributable to an intrinsic characteristic in the economic approach. Towards the end of the paper, the importance and the significance of such result was discussed, and then the answer to the research question was developed and formulated through asserting that the Accounting measurement is more consistent and, therefore, it is of a higher level of reliability as a tool to rationalize the managerial decision when deciding between the mutually exclusive alternatives.