A is correct.

Economic profit = Accounting profit – Total implicit opportunity costs

where:

Accounting profit = Total revenue – Total variable costs – Total fixed costs

Total opportunity costs = opportunity cost of capital + opportunity cost of labor

Total revenue	3,550 × $1,110 =	$3,940,500	(# units × average revenue)
Less: Total variable costs	3,550 × $750 =	$2,662,500	(# units × average var cost)
Less: Total fixed costs		$300,000	(Given)
Accounting profit		$978,000

Opportunity cost of capital	$1,550,000 × 0.125 =	$193,750	(Investment × Required return)
Opportunity cost of owner’s labor		$125,000	(Given)
Total opportunity costs		$318,750
Economic profit		$659,250

C is incorrect because it calculates the normal profit or the total implicit opportunity cost.

B is incorrect because it does not take into account the opportunity cost of labor. Total implicit opportunity cost = $1,550,000 × 0.125 = $193,750. Economic profit = $978,000

– $193,750 = $784,250.

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