Charlene Roberts is the controller for PARKCO, a company that owns and operates several parking garages in a large Midwestern American city. Recently, the management of PARKCO has been investigating the viability of building a parking garage in an area of the city that has experienced rapid growth. Some years ago, PARKCO acquired the necessary land at a cost of $425,000, and had demolished worthless buildings on the land at a cost of $72,000. Since then, the land has been rented by various construction companies as a temporary storage site for building materials while the construction companies completed projects in the area. PARKCO has averaged revenue of $5,000 per year for this use of the property. Roberts is currently assembling financial information relating to the proposed garage. In addition to the information already presented, she received from the CFO, John Demming, the following projections: Number of parking spaces in the proposed garage 840 Number of parking spaces rented at the monthly rate 420 Average number of parkers paying the daily rate (for each of the 20 business days per month) 180 Fixed costs to operate the garage per month $30,000 Roberts estimates the monthly variable cost of servicing each monthly parker is $12, and that the price of a monthly parking space would be $75. The estimated cost per daily parker is $2, and the daily parking rate is expected to be set at $8. The parking garage would operate 20 business days per month. Roberts believes, based on PARKCO’s past experience with similar garages, that the projected number of monthly and daily parkers was too high. When she questioned Demming he replied, “This garage is going to be built no matter what your past experiences are. Just use the figures I gave you.” Based on this scenario, answer the following five questions in your written paper: Define the concepts of sunk cost and opportunity cost. How are these two types of cost recorded in the accounting records? Identify the sunk costs and opportunity costs, if any, in the PARKCO scenario and show the amount of each. Using the data in the scenario, calculate pre-tax operating income. Show your calculations. What are some other concerns that Roberts should consider with this scenario? How would you suggest they handle the concerns?
Charlene Roberts is the controller for PARKCO, a company that owns and operates several parking garages in a large Midwestern American city. Recently, the management of PARKCO has been investigating the viability of building a parking garage in an area of the city that has experienced rapid growth. Some years ago, PARKCO acquired the necessary land at a cost of $425,000, and had demolished worthless buildings on the land at a cost of $72,000. Since then, the land has been rented by various construction companies as a temporary storage site for building materials while the construction companies completed projects in the area. PARKCO has averaged revenue of $5,000 per year for this use of the property.
Roberts is currently assembling financial information relating to the proposed garage. In addition to the information already presented, she received from the CFO, John Demming, the following projections:
| Number of parking spaces in the proposed garage | 840 |
| Number of parking spaces rented at the monthly rate | 420 |
| Average number of parkers paying the daily rate (for each of the 20 business days per month) | 180 |
| Fixed costs to operate the garage per month | $30,000 |
Roberts estimates the monthly variable cost of servicing each monthly parker is $12, and that the price of a monthly parking space would be $75. The estimated cost per daily parker is $2, and the daily parking rate is expected to be set at $8. The parking garage would operate 20 business days per month.
Roberts believes, based on PARKCO’s past experience with similar garages, that the projected number of monthly and daily parkers was too high. When she questioned Demming he replied, “This garage is going to be built no matter what your past experiences are. Just use the figures I gave you.”
Based on this scenario, answer the following five questions in your written paper:
-
- Define the concepts of sunk cost and opportunity cost.
- How are these two types of cost recorded in the accounting records?
- Identify the sunk costs and opportunity costs, if any, in the PARKCO scenario and show the amount of each.
- Using the data in the scenario, calculate pre-tax operating income. Show your calculations.
- What are some other concerns that Roberts should consider with this scenario? How would you suggest they handle the concerns?
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