Parrish Plumbing provides plumbing services to residential customers from Monday

Question

Parrish Plumbing provides plumbing services to residential customers from Monday through Friday. Ken Parrish, the owner, believes that it is important for his imployees to have Saturday and Sunday off to spend with their families. However, he also recognizes that this policy has implications for profitability, and he is considering staying open on Saturday.

Ken estimates that if his company stays open on Saturday, it can generate $2500 of daily revenue each day for 52 days per year. The incremental daily costs will be $700 for labor, $500 for parts, $100 for transportation, and $200 for office staff. These costs do not include a share of monthly rent or a share of depreciation related office equipment.

Ken is determined not to have employees work on Sunday, but he would like to know the opportunity cost of not working on Saturday. Provide Ken with an estimate of the opportunity cost, and explain why you do not have to consider rent or depreciation of office equipment in your estimate.

Explanation / Answer

Hi,

Please find the answer as follows:

Incremental Revenue = 2500*52 = 130000

Less Incremental Costs = 52*(700 + 500 + 100 +200) = 78000

Oppurtunity Cost = 130000 - 78000 = 52000

The rent or depreciation is not considered in the calculation because these are not relevant for the purposes of decision making. These costs represent fixed/sunk costs which the company will have to incurr irrespective of whether the company is functional on saturday or not.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects