Problem
Laura owns a successful hole-in-the-wall bagel shop. Laura wants to expand the shop by leasing the space next door for $500 per month, and adding tables and chairs so that customers can dine in. She figures that the tables and chairs will cost $4,000 and that the bagel machine, that cost $3, 500 five years ago, would have to be scrapped in favor of a larger machine costing $6, 400. She thinks sales would increase by $4,000 per month. Variable costs are 50% of sales.
a. What are the relevant costs and benefits of expanding into the new space?
b. What are the irrelevant costs and benefits of expanding into the new space?