Pete's Coffee, Inc., operates a small coffee shop in the downtown area. Profits have been declining, and management is planning to expand and add ice cream to the menu. The annual ice cream sales are expected to increase revenue by $40,000. The cost of purchasing ice cream from the manufacturer is $20,000. The coffee shop and ice cream shop will be supervised by the present manager. However, due to expansion, the labor costs and. utilities would increase by 50 percent. Rent and other costs will increase by 20 percent.

a. Prepare a report of the differential costs and revenues if ice cream is added. (Hint:
Use format of Illustratio 1-2.)

b. Should management open the ice cream shop?

Transcribed Image Text:

PETE'S COFFEE, INC. Annual Income Statement Before Expansion Sales revenue $38,000 Costs: Food ... 15,000 Labor... .. 12,000 Utilities Rent... 2,000 4,000 Other costs Manager's salary Total costs 2,000 6,000 41,000 Operating profit (loss) . . . . . . $ (3,000)