Question 1

Tiptop

Street Deli's owner is disturbed by the poor profit performance of his ice cream counter.

He has

prepared the following profit analysis for the year Just ended

.

$

$

Sales

67,500

Less: Cost of sales

30,000

Gross profit

37,500

Less:

Operating Expenses:

Wages of counter staff

18,000

Paper material costs (e.g. Napkins)

6,000

Utilities (allocated)

4,350

Depreciation of counter equipment and furniture

3,750

Depreciation of building (allocated)

6,000

Deli managerial

salaries (allocated)

4,500

Total

42,600

Loss on ice cream counter

(5,100)

Required:

1.

In the above owner's analysis

,

what costs (amounts) are incorrectly

allocated

?

2.

Show a better analysis and indicate the net financial effect (profit or loss)

of

dropping the ice cream counter.

Question 2

Give two examples of sunk costs, and explain why they are irrelevant in decision making.