Nathan T Corporation is comparing two different options. Nathan T currently uses

Question

Nathan T Corporation is comparing two different options. Nathan T currently uses Option 1, with revenues of $61,000 per year, maintenance expenses of $4,700 per year, and operating expenses of $24,400 per year. Option 2 provides revenues of $56,000 per year, maintenance expenses of $4,700 per year, and operating expenses of $20,700 per year. Option 1 employs a piece of equipment which was upgraded 2 years ago at a cost of $16,000. If Option 2 is chosen, it will free up resources that will bring in an additional $4,000 of revenue. Complete the following table to show the change in income from choosing Option 2 versus Option 1. Designate Sunk costs with an “S” otherwise select "NA".

Option 1 Option 2 Net Income
Increase (Decrease) Sunk (S) Revenues $

$

$

NAS

Maintenance expenses

SNA

Operating expenses

SNA

Equipment upgrade

NAS

Opportunity cost

SNA

$

Explanation / Answer

There will be a net increase in operating income by $2700 if  Nathan T Corporation switches to Option 2 from Option 1.

option 1 option 2 net income Sunk increase/ decrease Revenues $ 61,000 $ 56,000 $       -5,000 Maintenace Expense $    4,700 $    4,700 $                -   NA Operating Expense $ 24,400 $ 20,700 $       -3,700 NA Equipment upgrade Sunk Opportunity cost $    4,000 $       -4,000 NA Total $         2,700

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