1. Sunk Opportunity Costs for DM

Mrs Johnson has taken out a lease on a shop for a down payment of 5000 GBP. Additionally, the rent under the lease amounts of 5000 per annum. If the lease is cancelled, the initial payment of 5000 will be forfeited. Mrs Johnson plans to use the shop for the sale of clothing and has estimated operations for the next 12 months as follows;

Sales 115,000

Less Value added tax (VAT) 15,000

Net of VAT 100,000

Cost of goods sold 50,000,

Wages and related costs 12,000

Rent including down payment 10,000

Rates, Heating , insurances 13,000

Audit and legal expenses 2,000 87,000

Net Profit before tax 13,000

As in the above, no provision has been made for the cost of Mrs Johnson but it is estimated that one half of their time will be devoted to the business. She is undecided whether to continue with her plans, because she knows that she can sublet the shop to a friend for a monthly rental of 550 GBP if she does not use the shop herself.

Required:

1. State what decision Mrs Johnson should make according to the information given supporting your decision with financial statement. (10 marks)
2. Explain the meaning and use of notional or imputed costs and quote 2 supporting examples (5 marks)