Problem: The Han calendar company started business on 1 January 2009. The company prints calendars to be used as advertisements by local firms. The firm has been losing money. They are now (1 March 2010) deciding whether to stop producing. The question is how much they will save by going out of business, that is, how much of their costs are sunk and how much of their costs are avoidable. For each item in this list, say how much of the cost is avoidable and why.
Q1. For each calender the firm produces, it needs to buy paper and ink. It buys the paper and ink for each job in the appropriate amount, and has no stock of paper or ink on hand at the end of a job.
Q2. The firm rented a facility in which to produce. The annual rent is 25, 000 dollars, payable on 1 January of each year. They can break their lease with six month’s notice. If they do, then the get back a pro-rated share of the rent their paid for the year.
Q3. The firm purchased a special printing machine for producing calenders when it started business. The machine cost 200 thousand dollars new. The Han company can sell the machine today for 115 thousand dollars.
Q4. The firm hires two Yale students to deliver the calenders once printed. The firm has agreed to pay the students 15 per hour, and has guaranteed them at least 10 hours of work per week (each) through the end of April 2010.
Q5. The firm’s manager is the owner’s wife and thus the firm does not pay her for her work. When she went to work for the firm, however, she quit a job that paid her 45 thousand dollars per year.
Q6. The firm uses two delivery vans. One van it has leased for three years, starting 1 January 2009. The monthly lease payments are 500 dollars, and the firm cannot get out of the lease (that is, even if it returns the van early, it still would have to make the payments). The Han family could, however, use this van as its personal vehicle. When it needs a second van, the firm rents one from a nearby rental company. For this van it pays 45 dollars per day plus 60 cents per mile plus the cost of fuel.