Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Entrepreneurship

Authors: Andrew Zacharakis, William D Bygrave

5th Edition

1119563097, 9781119563099

More Books

Students also viewed these Accounting questions

Question

Is the timing right to launch your venture?

Answered: 1 week ago

Question

What are some costeffective ways for you to get started?

Answered: 1 week ago