Question

A profit-maximizing decision must be made about whether to keep a bed & breakfast operating. Until the place sells, the mortgage of $3000/month must be paid, since it is a sunk cost. If the restaurant operates, costs rise by $4000 per month, but revenue will be only $6000 per month. Until the building can be sold,

a.it is best to shut down the bed & breakfast since it is taking a loss.
b.it is best to ignore sunk costs and keep the bed & breakfast operating.
c.it is best to shut down the bed & breakfast even though it is making a profit
d.it is best to keep the bed & breakfast operating because it is profitable.

Answer 1

b.it is best to ignore sunk costs and keep the bed & breakfast operating.

Step-by-step explanation:

The owner of the store will face the mortgage cost wether the bed and breakfast is open or closed therefore it should be ignore in the short-term for the decision wether or not to keep the business open.

The business revenues are 6,000 while their cost 4,000 thie means there is a contribution of 2,000 then we subtract the mortage to get a loss 1,000

If closed the losses will increase to 3,000 asthe mortage expense would not disappear.

We should keep it open and look for ways to either sale or rent the space for a better gain than 2,000