Coffee Creations, a small coffee shop, is considering expanding its product offerings beyond coffee. The company is choosing between two alternatives—pastries and ice cream. Annual sales of pastries are expected to total \($30,000,\) with costs for the pastries of \($18,000.\) Annual sales of ice cream are expected to total \($20,000,\) with costs for the ice cream of \($7,000.\) Additional annual utility costs of \($3,000\) (for the freezers) will be incurred if ice cream is sold. Regardless of the alternative selected, the coffee shop will no longer use equipment purchased last year for \($5,000.

Required

a. What is the opportunity cost of selecting pastries over ice cream?

b. What is the opportunity cost of selecting ice cream over pastries?

c. Using the format in Table 1.4, perform differential analysis to determine which alternative is more profitable, and by how much.

d. Is the \($5,000\) spent on equipment last year important in deciding which option to choose? Explain.