Exercise 13-5A (Algo) Opportunity Costs

Norman Dowd owns his own taxi, for which he bought a $12,200 permit to operate two years ago. Mr. Dowd earns $36,600 a year operating as an independent but has the opportunity to sell the taxi and permit for $43,500 and take a position as a dispatcher for Carter Taxi Co. The dispatcher position pays $34,500 a year for a 40-hour week. Driving his own taxi, Mr. Dowd works approximately 55 hours per week. If he sells his business, he will invest the $43,500 and can earn a 10 percent return.

Required:

a. Determine the opportunity cost of owning and operating the independent business.

b. Calculate the earnings of Norman Dowd operating as an independent and the earnings of Norman Dowd working as a dispatcher.

c. Based solely on financial considerations, should Mr. Dowd sell the taxi and accept the position as a dispatcher?

The opportunity cost of owning and operating the independent business is the potential earnings Norman Dowd would give up if he sells the taxi and accepts the position as a dispatcher. To calculate the opportunity cost, we need to compare the earnings of Norman Dowd as an independent operator with the potential earnings from selling the taxi and permit.

Currently, Norman Dowd earns $36,600 per year operating his own taxi. However, he has the opportunity to sell the taxi and permit for $43,500 and take a position as a dispatcher at Carter Taxi Co. The dispatcher position pays $34,500 per year for a 40-hour week.

To calculate the opportunity cost, we need to determine the potential earnings from selling the taxi and permit. If Norman Dowd sells the business for $43,500, he can invest that amount and earn a 10% return. Therefore, the potential earnings from the investment would be 10% of $43,500, which is $4,350 per year.

Now let's compare the earnings as an independent operator and as a dispatcher:

- Earnings as an independent operator: $36,600 per year
- Earnings as a dispatcher: $34,500 per year

From a financial standpoint, if Norman Dowd sells the taxi and accepts the position as a dispatcher, he would earn $34,500 per year, which is less than his current earnings as an independent operator. Additionally, if he sells the taxi, he would also lose the potential earnings from the investment of $4,350 per year.

Based solely on financial considerations, it would not be beneficial for Mr. Dowd to sell the taxi and accept the position as a dispatcher, as he would earn less compared to his current earnings and would also lose the potential earnings from the investment.

learn more about opportunity here

https://brainly.com/question/30726111

#SPJ11