Managerial Accounting

Question 1 (Points 90)

Tiptop Street Deli's owner is disturbed by the poor profit performance of his ice cream counter. He has prepared the following profit analysis for the year Just ended.

	$	$
Sales		67,500
Less: Cost of sales		30,000
Gross profit		37,500
Less: Operating Expenses:
Wages of counter staff	18,000
Paper material costs (e.g. Napkins)	6,000
Utilities (allocated)	4,350
Depreciation of counter equipment and furniture	3,750
Depreciation of building (allocated)	6,000
Deli managerial salaries (allocated)	4,500
Total		42,600
Loss on ice cream counter		(5,100)

Required:

1. In the above owner’s analysis, what costs (amounts) are incorrectly allocated?

2. Show a better analysis and indicate the net financial effect (profit or loss) of dropping the ice cream counter.

Question 2 (Points 10)

Give two examples of sunk costs, and explain why they are irrelevant in decision making.