Question
John has just resigned from his $8,000-a-month job to start up his own accounting service firm. He has paid a non-refundable 3-month advanced rental payment
John has just resigned from his $8,000-a-month job to start up his own accounting service firm.
He has paid a non-refundable 3-month advanced rental payment of $9,000 for an office space.
To ensure his continued tenancy, the owner has agreed that after the first three months, the rental
will be reduced to $2,500 per month.
John estimated that his yearly revenue and expenses would vary with the number of hours he
intends to work per year. He has the following estimates for his first year of operation:
Number of hours worked 1,500 hours 1,900 hours
Revenue and expenses: $ $
Revenue 337,500 427,500
Less: - Operating expenses 37,000 45,000
- Rental expense 31,500 31,500
Profit 269,000 351,000
A day after making the advanced rental payment, John received a phone call from his ex-boss,
promising him a promotion to a monthly salary of $9,500 if he goes back to work for him. John
is now undecided whether to continue with his business plans, or to go back to work in his
previous company.
Required:
(a) Briefly describe "relevant" costs or information. Identify two relevant and two irrelevant
costs or information that John is faced with in the above case. Briefly explain your answer.
(14 marks)
(b) Briefly describe "sunk" costs. Explain whether the annual rental expense in the above case
is a sunk cost. (9 marks)
(c) Briefly describe "opportunity" costs. Identify and describe three opportunity costs from the
above case. (8 marks)
(d) Briefly describe "Operating expenses" and "Rental expense" with respect to their cost
behaviour. Support your answer with detailed workings. (8 marks)
(e) Briefly describe three differences between period and product costs. Briefly explain whether
the expenses in the case are period or product costs, clearly stating the reasons for your
assertion. (7 marks)
(f) Compute the revenue, expenses and final profit if John decides to work 2,160 hours during
the first year in his accounting services business. (4 marks)
(Total 50 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
a Relevant costs or information are those that are directly applicable to the decisionmaking process In this case John should consider the following relevant costs 1 Opportunity cost The potential inc...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started