Ben decides to expand his ice cream store so he can begin selling sub sandwiches.He spends $20,000 in preparing his new sandwich shop.His marginal cost of selling sub sandwiches is $3 and he estimates that he can sell 10,000 subs for $6 each.He soon learns of a nearby store that is now selling identical subs for $3.50 each.Ben should:
A)quit selling subs since his average total cost of selling subs is greater than the $3.50 price he would now have to charge.
B)sell subs for $3.50 each,considering the $20,000 to be a sunk cost and ignoring it.
C)sell subs as long the price he receives exceeds his average fixed costs of selling subs.
D)lower his price to $5 to cover his average total cost of selling subs.

Question

Quizplus · Accepted Answer

Ben should consider the $20,000 as a sunk cost, which means it's a cost that has already been incurred and cannot be recovered. Therefore, when making decisions about pricing and whether to continue selling subs, he should ignore this cost. The key is to look at the marginal cost of producing the subs ($3) and the price he can sell them for ($3.50). As long as the price exceeds the marginal cost, Ben can cover his variable costs and contribute to covering any fixed costs, even if those fixed costs are sunk.

Ben Decides to Expand His Ice Cream Store So He