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 S4.25 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 1 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 These savings will be withdrawn and used for about a year to get the business going.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 the new company. Todd has already paid the legal and filing fees to incorporate his business. These fees

Answer 1

Ans (2):

"Differential Cost" refers to an item of cost which is different among two alternatives. It is relevant for decision making.

"Non Differential Cost" refers to an item of cost which is not different among two alternatives. It is not relevant for Decision making.

In the given example, all cost are differential cost except, Legal and filing Fees of $1500. Since, it is past cost/sunk cost/historical cost and had already incurred.

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