Complete Question:
A friend of yours has been thinking about quitting her regular day job and going into business for herself. She currently makes $63,000per year as an employee of the Ajax Company, and she anticipates no raise for at least another year. She believes she can make $205,000 as an independent consultant in six-sigma "black belt" training for large corporations. Her start-up expenses are expected to be $102,000 over the next year. If she decides to keep her current job, what is the expected opportunity cost of this decision? Attempt to balance the pros and cons of the option that your friend is turning away from.
Answer:
I would advice her to quit working as an employee and start working as an independent consultant.
Explanation:
Now here we will compute the net earnings arising from each opportunity.
<u>Case 1: Opportunity to carry on his job</u>
The relevant costs include is the Salary earnings which is $63,000.
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<u>Case 2: Opportunity to earn as an Independent Consultant</u>
Independent Business Earnings are at $205,000 and the expenses associated with the opportunity is at $102,000.
This means the net earnings are = $205,000 - $102,000 = $103,000
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<u>Decision Rule:</u>
The opportunity cost to leave the job and start working as an independent consultant would be $63,000.
If the person is desiring to pick her career over the independent consultant then the opportunity cost of leaving an opportunity to earn as an independent consultant is $103,000.
Thus the decision must be quit working as an employee and start earning as an independent consultant.
