# 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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• Spring '16

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