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
Less: Cost of sales
Gross profit
Less: Operating Expenses:
Wages of counter staff
Paper material costs (e.g. Napkins)
Utilities (allocated)
Depreciation of counter equipment and furniture Depreciation of building (allocated)
Deli managerial salaries (allocated)
Total
Loss on ice cream counter
Required:
$$ 67,500
30,000 37,500
42,600 (5,100)
incorrectly
18,000 6,000 4,350 3,750 6,000 4,500
1. In the above owner’s analysis, what costs (amounts) are allocated?
2. Show a better analysis and indicate the net financial effect (profit or loss) of dropping the ice cream counter.
Question 2 (Points 10)
Give two examples of sunk costs, and explain why they are irrelevant in decision making
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