Problems with distinguish "sunk costs" and "variables costs
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1. First, we should distinguish "sunk costs" and "variables costs. Sunk costs are fees that you have paid and does not come back even if you don't produce anything. Variable costs are fees that you pay as you generate revenue, and once you stop producing, then you no longer incur variable costs.
It is quite clear that labour and rent are sunk costs (because you signed a lease, so that money does not come back regardless of your decision regarding getting the new copier). So we should not consider this cost in our decision making process.
We are given that we can sell 500,000 coloured copies/year, with 0.1/copy. This means that the revenue is $50,000. The cost of paper is 0.02/copy, which means that selling 500,000 copies incurs 10,000. No costs for ink is mentioned in the question, so I assume that either 0.02/page includes ink, or buying the photocopier comes with ink with will last for 1 year.
With these information, we can make a ...
Solution Summary
Problems with distinguish "sunk costs" and "variables costs.
Analyze Cost and Role in Decision Making
Analyzing Cost and Its Role in Decision Making
The concept of opportunity cost and examination of how to calculate the cost of alternatives over single and multiple time periods. Analyze cost and its role in the decision-making process by answering the following questions:
? Citing examples, differentiate between opportunity cost, marginal cost, and relevant cost.
? Assess the relationship of marginal benefit and marginal costs. How is marginal benefit measured, and how does it relate to marginal costs?
? What other factors must managers address before making decisions? Why?