Louise Njambi has taken a lease on a stall from the county government at a down payment of Sh.50,000. The annual
rental payment amounts to Sh.50,000. If the lease is cancelled, the initial payment of Sh.50,000 is forfeited. Louise
plans to use the stall in selling women's clothes and the estimated operation costs for the next 12 months are as
follows:
| Sh. | Sh. |
| Sales | | 1,150,000 |
| Value added tax (VAT) | | (150,000) |
| Net sales | | 1,000,000 |
| Cost of goods sold | 500,000 | |
| Wages and casual labour | 120,000 | |
| Rent including the down payment | 100,000 | |
| Rates, heating, lighting and insurance | 130,000 | |
| General expenses | 20,000 | (870,000) |
| Net profit | | 130,000 |
Additional information:
1. No provision has been made for Louise Njambi's salary but it is estimated that half of her time will be
devoted to the business.
2. She has an option of subletting the stall to a friend at a monthly rent of Sh.5,500 if she does not use the stall
herself.
Required:
(i) Explain using relevant examples from the situation depicted above; sunk costs and opportunity costs.
(ii) Using a cost analysis statement, advise Louise Njambi on whether to use the stall herself or sublet it.
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