Question

A friend of yours has been thinking about quitting her regular day job and going into business for herself. She currently makes ​$ per year as an employee of the Ajax​ Company, and she anticipates no raise for at least another year. She believes she can make ​$ as an independent consultant in​ six-sigma "black​ belt" training for large corporations. Her​ start-up expenses are expected to be ​$ 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 1

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.

Case 1: Opportunity to carry on his job

The relevant costs include is the Salary earnings which is $63,000.

Case 2: Opportunity to earn as an Independent Consultant

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

Decision Rule:

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.