Question

Nathan T Corporation is comparing two different options. Nathan T currently uses Option 1, with revenues of $62,000 per year, maintenance expenses of $4,800 per year, and operating expenses of $25,000 per year. Option 2 provides revenues of $58,000 per year, maintenance expenses of $4,800 per year, and operating expenses of $21,100 per year. Option 1 employs a piece of equipment which was upgraded 2 years ago at a cost of $16,000. If Option 2 is chosen, it will free up resources that will bring in an additional $4,000 of revenue. Complete the following table to show the change in income from choosing Option 2 versus Option 1. Designate Sunk costs with an “S” otherwise select "NA". (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

		Option 1		Option 2		Net Income Increase (Decrease)		Sunk (S)
Revenues		$		$		$		SNA
Maintenance expenses								SNA
Operating expenses								SNA
Equipment upgrade								SNA
Opportunity cost								NAS
						$

Answer 1

	Option 1	Option 2	Net income increase/(decrease) if option 2 is choosen [option 2 - option 1]	Sunk
Revenue	62000	58000	(4000)	NA
Maintenance expenses	4800	4800	0	NA
Operating expense	25000	21100	3900	NA
equipment upgrade	16000	0		16000
Opportunity cost	4000	0	-4000	NA
			3900

#Sunk cost is a cost that is incurred in past thus it is a irrelevant cost to current decision making

#opportunity cost is a cost of benefit forgone if one alternative is choosen over other .so additional revenue earned if option 2 is selected will be an opportunity cost for option 1 .