A recent Leeds Metropolitan University graduate has developed a new product. She now has to decide whether to set up in business.

She has been advised that the demand for the product is likely to be as follows:

Sales price per unit	Sales volume per year
100	650
150	500
200	400
250	250

The costs associated with the manufacture, selling and distribution of the product would be:

Variable cost per unit: 75

Fixed costs: 10,000 per year

The costs stated above exclude the following additional considerations:

(i) The student has already incurred 500 on market research and intends to spend a further 500; and

(ii) The student will pay herself a monthly salary of a 800. If she decides to go ahead with the product development she will have to give up her job as an administrative assistant which pays her a salary of 500 per month.

1. In deciding whether or not to set up the business the total market research costs are classified as:

(a) a sunk cost of 1000 which may be ignored

(b) a sunk cost of 500 which may be ignored and a relevant cost of 500

(c) an opportunity cost of 500

(d) an opportunity cost of 500 and a relevant cost of 500

2. In deciding whether or not to set up the business the salary the student earns as an administrative assistant should be treated as:

(a) an incremental benefit of 300 per month

(b) an opportunity cost of 500 per month

(c) an opportunity cost of 300 per month

(d) an opportunity cost of 1000 per month

3. If the student decides in favour of setting up the business, which of the selling prices should be charged, on the basis of the estimates given, in order to maximise profits?

(a) 100

(b) 150

(c) 200

(d) 250