Question 2 a the sunk costs include all the costs she

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Question 2 a. The sunk costs include all the costs she cannot recover. The total sunk cost is $21,000. The restaurant spent $8,000 on advertising and they for a license they had spent $90,000. The
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Surname 2 license was then sold at $77,000 and the total lost they suffered was $13,000 of their original investment. b. It was not a wise decision to spend $8,000 on advertising the license and end up selling it at $80,000 to gain only $5,000. Her alternative was giving up the license and receiving $75,000 hence choosing to spend on advertising is a guaranteed loss. c. I would recommend that she accept the $77,000 offer because it is more than the alternative by $2,000. The $8,000 is a sunk cost, which cannot be recovered whether the $77,000 offered is accepted, or not. Question 3 The decision requires use of incremental analysis. The incremental revenues are 5,000 units x $25 = $125,000. Incremental costs = (variable costs = 5,000 units x $18 variable cost per unit plus shipping costs which are 5,000 units x $1 per unit) = $90,000 + $5,000 = $95,000. Incremental profit = incremental revenues – incremental costs = $(125,000 – 95,000) = $30,000. Therefore, the company should accept the special offer as it would increase their profits.
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