Sharon Has Received an Offer to Purchase Her Bakery

question 63

Multiple Choice

Sharon has received an offer to purchase her bakery. The first offer is for $60,000 now along with two payments of $25,000 at the end of each year for two years. The second offer is for $30,000 now, no payment in year 1 and $45,000 in years 2 and three. If interest is calculated at 4.2% compounded monthly, determine whether the first offer is the better alternative, and by how much.

• A) Option 1 by $2,500.66
• B) Option 1 by $4,099.21
• C) Option 2 by $4,099.21
• D) Option 2 by $2,500.66
• E) Option 2 by $750.25

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Definitions:

Product Cost

The total expense incurred in the creation of a product, including direct materials, direct labor, and overhead costs.

Period Cost

Expenses that are not directly tied to the production process and are instead expensed in the period they are incurred.

Variable Cost

Costs that change in proportion to the level of output or activity, such as materials and labor involved directly in production.

Fixed Cost

Expenses that do not change in proportion to the volume of goods or services a company produces, such as rent, salaries, and insurance premiums.