Andrew has decided to open an online store that sells home and garden products.
ID: 1221274 • Letter: A
Question
Andrew has decided to open an online store that sells home and garden products. After searching around, he chooses the software company Initech to provide the software for his website since their product required the least amount of specialized investments for him to use it. They agreed upon price of $5,000. To use Initech’s software, Andrew makes $2,400 in sunk capital investments and spends 65 hours learning how to use Initech’s software, which is very different from other software packages. Both Andrew and Initech view Andrew’s time as worth $24 per hour and Initech is fully aware of the investments Andrew must make to use their product. After Andrew’s investments were made, Initech came to Andrew and asked for more money. How much do you think they asked for?
Explanation / Answer
Ans. Intech will receive a sum of $3000 as decided between intech and andrew. However, andrew has added the cost of time also in the investment cost. The cost of time = $25*40 = $1,000.
This extra cost is demanded by the intech in addition to $3,000. The sunk cost cannot be recovered and thus, is not included in the cost. Therefore, total money demanded is $4,000.