Parrish Plumbing provides plumbing services to residential customers from Monday through Friday. Ken Parrish, the owner, believes that it is important for his imployees to have Saturday and Sunday off to spend with their families. However, he also recognizes that this policy has implications for profitability, and he is considering staying open on Saturday.

Ken estimates that if his company stays open on Saturday, it can generate $2500 of daily revenue each day for 52 days per year. The incremental daily costs will be $700 for labor, $500 for parts, $100 for transportation, and $200 for office staff. These costs do not include a share of monthly rent or a share of depreciation related office equipment.

Ken is determined not to have employees work on Sunday, but he would like to know the opportunity cost of not working on Saturday. Provide Ken with an estimate of the opportunity cost, and explain why you do not have to consider rent or depreciation of office equipment in your estimate.

2. Parrish's monthly rent or depreciation related to office equipment are not considered because they are not incremental costs. Non-incremental costs do not make any difference to the decision to work on Saturday or not. Therefore, the costs are regarded as sunk, because they must be incurred no matter the decision. They are therefore irrelevant and non-variable in nature.

Explanation:

Daily revenue = $2,500

less relevant or incremental expenses:

Labor $700

Parts 500

Transport 100

Office staff 200 (1,500)

Incremental profit $1,000 per week

Annual incremental profit = $52,000 (52 * $1,000) or opportunity cost