Joseph Giovine owns a successful hole-in-the-wall bagel shop called Peach Tree Bagels. Joseph wants to expand the shop by leasing the space next door for $1,000 per month and adding tables and chairs so that customers can dine in. He figures that the tables and chairs will cost $5,000 and that the bagel machine, which cost $4,500 five years ago, will have to be scrapped in favour of a larger machine costing $7,400. He thinks sales will increase by $5,500 per month. Variable costs are 55% of sales. A. What are the relevant costs and benefits of expanding into the new space? B. What are the irrelevant costs and benefits of expanding into the new space?

Joseph Giovine owns a successful hole-in-the-wall bagel shop called Peach Tree Bagels. Joseph wants to expand the shop by leasing the space next door for $1,000 per month and adding tables and chairs so that customers can dine in. He figures that the tables and chairs will cost $5,000 and that the bagel machine, which cost $4,500 five years ago, will have to be scrapped in favour of a larger machine costing $7,400. He thinks sales will increase by $5,500 per month. Variable costs are 55% of sales. A. What are the relevant costs and benefits of expanding into the new space? B. What are the irrelevant costs and benefits of expanding into the new space?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

Problem 11E

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A.	What are the relevant costs and benefits of expanding into the new space?
B.	What are the irrelevant costs and benefits of expanding into the new space?