MANAGEMENT ACCOUNTING

Question 3 [10 marks] Mrs. Letsatsi has taken out a lease on a shop for a deposit of R5000. In addition, the rent under the lease amounts to R5000 per annum. If the lease is cancelled, the initial payment of R5000 is forfeited. Mrs. Letsatsi plans to use the shop for the sale of clothing and has estimated operations for the next 12 months as follows: Sales R120 000 Less Value added Tax(VAT) 20 000 Sales less Vat 100 000 Cost of goods sold 50 000 Wages and wage related costs 2 000 Rent including down payment 10 000 Rates, water and electricity 13 000 Audit, legal and general expenses 2 000 Total costs 87 000 Net profit before tax 13 000 In the figures no provision has been made for the cost of the time Mrs Letsatsi spends on the business. It is estimated that she devotes one half of her time to the business. She is undecided whether to continue with her plans or sublet the shop to a friend for a monthly rental of R550. Required: 1. Explain and identify the sunk and opportunity costs in the situation depicted above. Limit your explanation to 2 sentences each cost. (4 marks) 2. State what decision Mrs Letsatsi should make based on the financial information supplied. Draw up a mini income statement to come to a conclusion. (6 Marks)