Question

Ayayai Corporation is comparing two different options. Ayayai currently uses Option 1, with revenues of $48,000 per year, maintenance expenses of $3,700 per year, and operating expenses of $19,200 per year. Option 2 provides revenues of $44,000 per year, maintenance expenses of $3,700 per year, and operating expenses of $16,300 per year. Option 1 employs a piece of equipment which was upgraded 2 years ago at a cost of $13,000. If Option 2 is chosen, it will free up resources that will bring in an additional $3,000 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". (If amount decreases net income then enter the amount 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		$		$		$		NAS
Maintenance expenses								SNA
Operating expenses								SNA
Equipment upgrade								NAS
Opportunity cost								SNA
						$

Answer 1

1. The change in income from choosing Option 2 versus Option 1.

Sunk Costs -

Sunk Costs are the cost that once spend can not recover. In the above example Equipment upgareded is Sunk Cost that is past cost that can not be changed.

Opportunity Costs -

Opportunity Costs are benefit loss from chosing one option against another.