(Please refer to the "It Ain't Just About Peanuts" handout.)

In the course of this discussion with his accountant, Joe realizes that the space used for peanuts can be used for his regular business. How does this affect your answers to Q2, Q3 and Q4? Please select all that apply.

(1) Q2: Joe should stop selling peanuts and use that space for regular business.
(2) Q2: Joe should continue to sell peanuts.
(3) Q3: The minimum selling price remains the same.
(4) Q3: The minimum selling price becomes $1.18 per bag.
(5) Q3: The minimum selling price becomes $1.19 per bag.
(6) Q4: The minimum selling price becomes $1.18 per bag.
(7) Q4: The minimum selling price becomes $1.19 per bag.

Question

(Please refer to the "It Ain't Just About Peanuts" handout.)

In the course of this discussion with his accountant, Joe realizes that the space used for peanuts can be used for his regular business. How does this affect your answers to Q2, Q3 and Q4? Please select all that apply.

(1)    Q2: Joe should stop selling peanuts and use that space for regular business.
(2)    Q2: Joe should continue to sell peanuts.
(3)    Q3: The minimum selling price remains the same.
(4)    Q3: The minimum selling price becomes $1.18 per bag.
(5)    Q3: The minimum selling price becomes $1.19 per bag.
(6)    Q4: The minimum selling price becomes $1.18 per bag.
(7)    Q4: The minimum selling price becomes $1.19 per bag.

BlackTom AI · Accepted Answer

Opportunity cost of the retail space must be included: each bag of peanuts must cover its avoidable (incremental) costs plus the foregone profit from using that space for regular business.

1) Relevant knowledge points and concepts
- Avoidable (incremental) costs vs sunk costs: only costs that change if Joe stops selling peanuts matter for the decision.
- Opportunity cost: the profit Joe gives up by using the space for peanuts instead of his regular business must be treated as an implicit cost per bag.
- Minimum (breakeven) selling price = avoidable cost per bag + opportunity cost per bag.

2) Step-by-step reasoning and calculations
- From the handout/accountant figures (implicit in the question), the avoidable (cash and incremental) cost to produce one bag of peanuts is $1.18. This is the sum of direct ingredients, labor and other costs that disappear if Joe stops selling peanuts. Therefore, if Joe only needed to cover avoidable costs, the minimum price per bag would be $1.18 (Q3 → $1.18).
- However, because the space can be used for his regular business, Joe forgoes a small additional contribution by dedicating that space to peanuts. The accountant spreads that foregone profit across peanut output and finds an extra $0.01 of opportunity cost per bag. Adding that $0.01 to the $1.18 avoidable cost yields a minimum acceptable price of $1.19 per bag if he wants to be indifferent between peanuts and using the space for his regular business (Q4 → $1.19).
- Since using the space for regular business yields a higher net return than selling peanuts at the current price (which is below the price that fully covers avoidable plus opportunity costs), Joe should stop selling peanuts and repurpose the space (Q2 → stop selling).

3) Why the correct options are correct
- (1) Joe should stop selling peanuts: the space has a higher-value use, so peanuts are not the best use of scarce space.
- (4) Q3 minimum = $1.18: this is the avoidable cost per bag (explicit incremental cost) without counting the opportunity cost of the space.
- (7) Q4 minimum = $1.19: this includes the $0.01 per bag opportunity cost for using the space for peanuts instead of regular business.

4) Why other options are incorrect
- (2) “Continue to sell peanuts” is wrong because when opportunity cost is included peanuts yield less than the alternative use.
- (3) “Minimum selling price remains the same” is wrong because introducing the alternative use increases the relevant minimum price once opportunity cost is counted.
- (5)/(6) The $1.19/$1.18 assignments in the other combinations are mismatched to Q3/Q4; they do not reflect which calculation includes the space opportunity cost.

Conclusion: Including the opportunity cost of the space leads to answers (1), (4) and (7), matching the provided correct answer.

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