Rita Kumi started a photography business i.e RitaKum Portraits Ltd at the beginning of the year. Before she could operate, she paid ¢250 for business cards, ¢1,250 for business registration, and ¢250 as annual business license to the local assembly. She likewise leased a professional portrait camera and studio lighting equipment by signing an agreement to pay a monthly lease of ¢300 each month for the next 12 months. This lease is ironclad: She must pay for all 12 months and she cannot sublease to anyone else. She rents her office and studio for ¢400 per month that must be paid at the start of each month. She does not have a lease on the office/studio, so she can vacate the office/studio at the end of any month should she decide to move to a new location or to go out of business. After she opens the office/studio on the first day of each month, her monthly cost of power for lighting the office and running her coffee machine is constant at ¢45 per month, because she always keeps the lights on in the office and drinks the same amount of coffee no matter how many photos she shoots each month. Additional electricity is required for the portrait studio lights, which varies directly with the number of hours the lights are used each month for photo sessions. Last year, before starting this business, the owner of RitaKum Portraits Ltd earned a salary of ¢5,000 per month working at a bank. Answer the following questions about the costs for Exquisite Portraits Inc.: i. What are monthly fixed costs, quasi-fixed costs, and variable costs for Exquisite Portraits Inc? ii. If the owner of Exquisite Portraits Inc. wants to close her studio and go out of business at the end of August, identify her sunk costs and avoidable costs. iii. At the end of August, what role would the sunk costs play in the owner/photographer’s decision to go out of business?
Rita Kumi started a photography business i.e RitaKum Portraits Ltd at the
beginning of the year. Before she could operate, she paid ¢250 for business
cards, ¢1,250 for business registration, and ¢250 as annual business license
to the local assembly. She likewise leased a professional portrait camera and
studio lighting equipment by signing an agreement to pay a monthly lease of
¢300 each month for the next 12 months. This lease is ironclad: She must
pay for all 12 months and she cannot sublease to anyone else. She rents her
office and studio for ¢400 per month that must be paid at the start of each
month. She does not have a lease on the office/studio, so she can vacate the
office/studio at the end of any month should she decide to move to a new
location or to go out of business. After she opens the office/studio on the first
day of each month, her monthly cost of power for lighting the office and
running her coffee machine is constant at ¢45 per month, because she
always keeps the lights on in the office and drinks the same amount of coffee
no matter how many photos she shoots each month. Additional electricity is
required for the portrait studio lights, which varies directly with the number
of hours the lights are used each month for photo sessions. Last year, before
starting this business, the owner of RitaKum Portraits Ltd earned a salary
of ¢5,000 per month working at a bank.
Answer the following questions about the costs for Exquisite Portraits Inc.:
i. What are monthly fixed costs, quasi-fixed costs, and variable costs for Exquisite Portraits Inc?
ii. If the owner of Exquisite Portraits Inc. wants to close her studio and go out of business at the end of August, identify her sunk costs and avoidable costs.
iii. At the end of August, what role would the sunk costs play in the owner/photographer’s decision to go out of business?
iv. In making her decision to start her own business, would her decision have been more or less difficult to make if sunk costs were zero at Exquisite Portraits? Explain.
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