Disc 10: Original post due Sunday, April 15; replies to others due Tuesday, Apri
ID: 2522104 • Letter: D
Question
Disc 10: Original post due Sunday, April 15; replies to others due Tuesday, April 17 Bob Waldorf is in charge of buying property to be used as branch office sites for the Kenner National Bank (KNB). Mr. Waldorf paid $120,000 in July 2017 for a lot (Site A) located in a growing section of the city. Early in 2018, Mr. W has a chance to purchase a better lot (Site B) for $80,000 The traffic count for Site B is twice the traffic count for Site A and has a much bigger parking lot. The current market price for Site A is now $100,000. Mr. W thinks it would be in the bank's best interest to sell Site A and purchase Site B but he doesn't want to look bad in the eyes of his boss, Fred Meanster (even though Mr. M has made plenty of bad decisions himself). In any case, Mr. W must get Mr. M's permission to sell Site A and then purchase Site B king toring Hill Required: 1. Determine the amount of the loss that would be recognized if the Site A were to be sold for $104,000 2. Identify the type of cost (sunk, opportunity) that is represented by the original price of Site A Is this cost relevant to decision-making? Why or why not? 3. Identify the type of cost (sunk, opportunity) that is represented by the current market value of Site B. Is this cost relevant to decision-making? Why or why not? 4. Name two other important facts do you think that Mr. W would like to know before bringing the proposal to Mr. Meanster? lete sentences . Cite all sources used comple e numbers or URLs searchExplanation / Answer
Cost of Site A - $120,000
Current Selling price of Site A - $104,000
Amount of loss to be recognized by selling Site A - $16,000 ($120,000-$104,000)
Cost of Site A is SUNK COST as it has been already purchased (Historical Cost)
Sunk costs are irrelevant in decision making, since they are past costs i.e.
Either Historical Costs incurred in the past, cost of a resource already acquired,
Or Committed Costs i.e. costs in respect of which a decision is already made in the past, and cannot be altered by any future decision.
Current market value of Site B is OPPURTUNITY COST as it represents the value sacrificed or benefit forgone by selecting Site A
Opportunity costs are relevant in decision making as they help in calculating the amount of profit or loss that might occur by choosing an alternative.
Other factors that can be shown by Mr. W in the proposal to Mr. Meanster are:
By purchasing Site B we have made a profit of $4,000(Calculation Shown Below)
Current Market price of Site A - $100,000
Current Market price of Site B - $80,000
Savings in Cost - $20,000 ($100,000 - $80,000)
Loss incurred by selling Site A - $16,000
Net Profit made - $4,000 ($20,000 - $16,000)
Site B has a much bigger parking lot
Current Selling price of Site A - $104,000
Amount of loss to be recognized by selling Site A - $16,000 ($120,000-$104,000)
Sunk costs are irrelevant in decision making, since they are past costs i.e.
Opportunity costs are relevant in decision making as they help in calculating the amount of profit or loss that might occur by choosing an alternative.
Current Market price of Site A - $100,000
Current Market price of Site B - $80,000
Savings in Cost - $20,000 ($100,000 - $80,000)
Loss incurred by selling Site A - $16,000
Net Profit made - $4,000 ($20,000 - $16,000)
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