Question

Todd Radford has invented a new type of low-friction broom. After giving the matter much thought, Todd is pretty sure he will quit his $2,000 per month job with a janitorial service and produce and sell the brooms full time. Todd will rent a small building and use it as a production plant. The rent will be $1,500 per month. Todd will rent production equipment at a cost of $550 per month. The cost of materials for each broom will be $11.50. Todd will hire workers to produce the brooms. They will be paid $4.25 for each completed unit. Todd will rent a room in the house next door for use as his sales office. The rent will be $250 per month. He has arranged for the telephone company to add voicemail to his home phone to get after-hours messages from customers. The addition of voicemail will increase his monthly phone bill by $5. Todd has some money in savings that is earning interest of $1,100 per year. These savings will be withdrawn and used for about a year to get the business going. To sell his brooms, Todd will advertise heavily in the local area. Advertising costs will be $450 per month. In addition, Todd will pay a sales commission of $0.80 for each broom sold. For the time being, Todd does not intend to draw any salary from the new company. Todd has already paid the legal and filing fees to incorporate his business. These fees amounted to $1,500.
Required:
1. Prepare an answer sheet with the following column headings:
List the different costs associated with the new company down the left column (under Name of Cost). Then place an X under each heading that describes the type of cost involved. There may be X’s under several column headings for a single cost. (That is, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.) Under the variable cost column, list only those costs that would be variable with respect to the number of low-friction brooms that are produced and sold.
2. All of the costs you have listed above, except one, are differential costs between the alternatives of Todd producing brooms or staying with the janitorial service. Which cost is not differential? Explain.


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  • CreatedJuly 08, 2015
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