Question

Johnson Company manufactures sporting goods. One of its products is generating very low operating income, and management is trying to decide whether it should keep or drop that product. Five years ago, the company paid $1,500,000 for the building in which the product is manufactured and $500,000 for the land. The net book value (original cost less accumulated depreciation) for the building is $1,375,000. Management paid the annual property taxes and insurance on the building two weeks ago ($30,000 total). The manufacturing equipment used to make the product was also purchased five years ago at a cost of $300,000 and has a net book value of $150,000. Management was recently approached by an individual who offered to pay $1,000,000 for the land, building, and equipment. Two weeks later, a second individual contacted management and offered to rent the manufacturing facilities for $20,000 per month Required a. Which of the above costs are opportunity costs with respect to deciding whether or not to continue to manufacture the product, and which are sunk costs: Opportunity/Sunk The $1,000,000 offered for the building, land and equipment. The $20,000 rent for manufacuring facilities. The original cost of the land ($500,000). Building ($1,500,000) Manufacturing equipment ($300,000). The net book value of the building ($1,375,000). The net book value equipment ($150,000). The insurance and taxes recently paid on the building ($30,000).

Answer 1

	Opportunity costs are costs that occur elsewhere in the company due to acceptance of an investment
	In simple words, It is the cost of missed Opportunity
	Sunk costs are costs that has already been incurred and cannot be recovered
	Particulars	Opportunity/Sunk	Remark
	The $1,000,000 offered for the building, land and equipment	Opportunity Cost	If Johnson company goes for rent option, $1,000,000 offer will be a cost of missed opportunity
	The $20,000 rent for manufacturing facilities	Opportunity Cost	If Johnson company goes for investment of $1,000,000, Rent option will be a cost of missed opportunity
	The orignal cost of the land ($500,000)	Sunk Cost	Its already incurred and cannot be recovered
	Building($1,500,000)	Sunk Cost	Its already incurred and cannot be recovered
	Manufacturng Equipment ($3,00,000)	Sunk Cost	Its already incurred and cannot be recovered
	The net book value of the building ($1,375,000)	Sunk Cost	Its already incurred and cannot be recovered
	The net book value of the equipment ($1,375,000)	Sunk Cost	Its already incurred and cannot be recovered
	The insurance and taxes recently paid on the building ($30,000)	Sunk Cost	Its already incurred and cannot be recovered