John has just resigned from his $8,000-a-month job to start up his own accounting service firm. He
Question:
John has just resigned from his $8,000-a-month job to start up his own accounting service firm.
He has paid a non-refundable 3-month advanced rental payment of $9,000 for an office space.
To ensure his continued tenancy, the owner has agreed that after the first three months, the rental
will be reduced to $2,500 per month.
John estimated that his yearly revenue and expenses would vary with the number of hours he
intends to work per year. He has the following estimates for his first year of operation:
Number of hours worked 1,500 hours 1,900 hours
Revenue and expenses: $ $
Revenue 337,500 427,500
Less: - Operating expenses 37,000 45,000
- Rental expense 31,500 31,500
Profit 269,000 351,000
A day after making the advanced rental payment, John received a phone call from his ex-boss,
promising him a promotion to a monthly salary of $9,500 if he goes back to work for him. John
is now undecided whether to continue with his business plans, or to go back to work in his
previous company.
Briefly describe "opportunity" costs. Identify and describe three opportunity costs from the
above case. (8 marks)
Expert Answer:
Opportunity costs refer to the potential benefits or opportunities that are forgone or sacrificed wh... View the full answer
