Sunk and opportunity costs for decision-making Mrs Johnston has taken out a lease on a shop for a down payment of €5,000. Additionally, the rent under the lease amounts to €5,000 per annum. If the lease is cancelled, the initial payment of €5,000 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:

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) explain and identify the ‘sunk’ and ‘opportunity’ costs in the situation depicted above

(b) state what decision Mrs Johnston should make according to the information given, supporting your conclusion with a financial statement.

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() () Sales 120,000 Less Value added tax (VAT) 20,000 Sales less VAT 100,000 Cost of goods sold 50,000 Wages and wage-related costs 12,000 Rent including the down payment 10,000 Rates, heating, lighting and insurance 13,000 Audit, legal and general expenses 2,000 87,000 Net profit before tax 13,000