Reference no: EM132993955

Question - Case information - John has just resigned from his $8,000-a-month job to start up his own accounting service firm.

He has paid a non-refundable 3-month advanced rental payment of $9,000 for an office space.

To ensure his continued tenancy, the owner has agreed that after the first three months, the rental will be reduced to $2,500 per month.

John estimated that his yearly revenue and expenses would vary with the number of hours he intends to work per year. He has the following estimates for his first year of operation:

Number of hours worked 1,500 hours 1,900 hours

Revenue and expenses: $ $

Revenue 337,500 427,500

Less: - Operating expenses 37,000 45,000

- Rental expense 31,500 31,500

Profit 269,000 351,000

A day after making the advanced rental payment, John received a phone call from his ex-boss, promising him a promotion to a monthly salary of $9,500 if he goes back to work for him. John is now undecided whether to continue with his business plans, or to go back to work in his previous company.

Required -

(a) Briefly describe "relevant" costs or information. Identify two relevant and two irrelevant costs or information that John is faced with in the above case. Briefly explain your answer.

(b) Briefly describe "sunk" costs. Explain whether the annual rental expense in the above case is a sunk cost.

(c) Briefly describe "opportunity" costs. Identify and describe three opportunity costs from the above case.

(d) Briefly describe "Operating expenses" and "Rental expense" with respect to their cost behaviour. Support your answer with detailed workings.

(e) Briefly describe three differences between period and product costs. Briefly explain whether the expenses in the case are period or product costs, clearly stating the reasons for your assertion.

(f) Compute the revenue, expenses and final profit if John decides to work 2,160 hours during the first year in his accounting services business.