A local restaurateur whose business had been profitable for many years recently

Question

A local restaurateur whose business had been profitable for many years recently purchased a liquor license, giving her a legal right to sell beer, wine and spirits at the restaurant. The license cost $75,000. While the license is transferable, only $65,000 is refundable if the owner chooses not to use it. After selling alcoholic beverages for about a year, the owner realized she was losing dinner customers and that her formerly profitable restaurant was becoming a noisy, unprofitable bar. Subsequently, she spent $6000 on advertisements in local newspapers and magazines offering to sell the license for $70,000. After a long wait, she received one offer to purchase the license for $66,000. Would you recommend she accept the $66,000 offer? Why or why not? Explain.

Explanation / Answer

I would recommend she sell the license for 66,000. this is clear because she will ear 1000 profit rather than refunding the license. She does however, have sunk cost. These however, can not be considered in the detail because they are sunk and not able to recover ever. These sunk cost include the 6000 for advertising. In the end, because she spent on advertising the selling of the license, she will only make 60,000 on the sale. In a case like this, we must remember, we cannot consider sunk cost in our equation becasue whether we sell the license or not, the advertising is already paid for and the expense is paid. I hope this helps clearify things

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