Ben Decides to Expand His Ice Cream Store So He

question 36

Multiple Choice

Ben decides to expand his ice cream store so he can begin selling sub sandwiches.He spends $20,000 in preparing his new sandwich shop.His marginal cost of selling sub sandwiches is $3 and he estimates that he can sell 10,000 subs for $6 each.He soon learns of a nearby store that is now selling identical subs for $3.50 each.Ben should:

• A)quit selling subs since his average total cost of selling subs is greater than the $3.50 price he would now have to charge.
• B)sell subs for $3.50 each,considering the $20,000 to be a sunk cost and ignoring it.
• C)sell subs as long the price he receives exceeds his average fixed costs of selling subs.
• D)lower his price to $5 to cover his average total cost of selling subs.

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Definitions:

Manufacturing Overhead Budget

An estimation of the costs that are not directly attributable to products but are necessary for the manufacturing process, including utilities, depreciation, and maintenance of equipment.

Non-Cash Charges

Expenses reported on the income statement that do not require an actual cash outflow, such as depreciation and amortization.

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life.

Cash Disbursements

The outflow of cash for expenses, such as payments to creditors, operational costs, and investment activities.