Peter Boking has worked as a muffler mechanic for several years and believes that he could make
Question:
He would need to acquire equipment such as hoists, tools, and storage racks. The nature of the equipment would differ depending on the choice he made with respect to the quality of mufflers being sold. The depreciation would be $105,000 per year for the high-end mufflers and $65,000 per year for the standard mufflers. He has found a person to handle all of the administration of the business at a cost of $50,000 per year, including all administration expenses. Advertising, which would be his only additional selling cost, would be either $15,000 per month for the high-end mufflers or $10,000 per month for the standard mufflers.
He hopes to be able to pay himself a salary of $100,000 for his own efforts in the business, half installation and half selling.
Required:
1. Prepare income statements for each alternative, separating costs into direct and indirect costs.
2. Is the business profitable enough for Peter to justify quitting his job and starting his own business?
3. Which alternative should Peter choose?
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Related Book For
Cornerstones of Managerial Accounting
ISBN: 978-0176530884
2nd Canadian edition
Authors: Maryanne M. Mowen, Don Hanson, Dan L. Heitger, David McConomy, Jeffrey Pittman
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