Question

Home Builder​ Supply, a retailer in the home improvement​ industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this​ store, which currently has an abandoned warehouse located on it. Last​ month, the marketing department spent $15,000 on market research to determine the extent of customer demand for the new store. Now Home Builder Supply must decide whether to build and open the new store. Which of the following should be included as part of the incremental earnings for the proposed new retail​ store?

a. The original purchase price of the land where the store will be located.

b. The cost of demolishing the abandoned warehouse and clearing the lot.

c. The loss of sales in the existing retail​ outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead.

d. The $15,000 in market research spent to evaluate customer demand.

e. Construction costs for the new store.

f. The value of the land if sold.

g. Interest expense on the debt borrowed to pay the construction costs.

Answer 1

The following are either costs to be incurred or opportunity costs and shall be included as part of the incremental earnings for the proposed new retail​ store:

(b ). The cost of demolishing the abandoned warehouse and clearing the lot.

(c ). The loss of sales in the existing retail​ outlet, if customers who previously drove across town to shop at the existing outlet become customers of the new store instead.

(e). Construction costs for the new store.

(f ). The value of the land if sold.

(g). Interest expense on the debt borrowed to pay the construction costs.

The following are sunk costs and hence shall not be included as part of the incremental earnings for the proposed new retail​ store:

(a ) The original purchase price of the land where the store will be located.

(d ) The $15,000 in market research spent to evaluate customer demand.