- Sunk And Opportunity Costs For Decision Making Mrs Johnston Has Taken Out A Lease On A Shop For A Down Payment Of 500 1 (173.77 KiB) Viewed 65 times
Sunk and opportunity costs for decision- making. Mrs Johnston has taken out a lease on a shop for a down payment of £5000. Additionally, the rent under the lease amounts to £5000 per annum. If the lease is cancelled, the initial payment of £5000 is forfeit. Mrs Johnston plans to use the shop for the sale of clothing, and has estimated operations for the next 12 months as follows: (£) (£) 115 000 15 000 100 000 Sales Less Value-added tax (VAT) Sales less VAT Cost of goods sold Wages and wage related costs Rent including down payment Rates, heating, lighting and insurance Audit, legal and general expenses 50 000 12000 10000 13000 2000 87000 13 000 Net profit before tax In the figures, no provision has been made for the cost of Mrs Johnston but it is estimated that one half of her time will be devoted to the business. She is undecided whether to continue with her plans, because she knows that she can sublet the shop to a friend for a monthly rent of £550 if she does not use the shop herself. You are required to: (a) (i) explain and identify the 'sunk' and 'opportunity' costs in the situation depicted above; (ii) state what decision Mrs Johnston should make according to the information given, supporting your conclusion with a financial statement;