Norman Dowd owns his own taxi, for which he bought a $10,000 permit to operate t

Question

Norman Dowd owns his own taxi, for which he bought a $10,000 permit to operate two years ago. Mr. Dowd earns $30,000 a year operating as an independent but has the opportunity to sell the taxi and permit for $36,500 and take a position as dispatcher for Carter Taxi Co. The dispatcher position pays $27,500 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 $36,500 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. Based solely on financial considerations, should Mr. Dowd sell the taxi and accept the position as dispatcher? a. Opportunity cost b. Operating as an independent Working as a dispatcher Should Mr. Dowd sell the taxi and accept the position as dispatcher?

Explanation / Answer

A)Opportunity cost is a amount of profit forgone : [36500*.10*2] interest = 7300

= 7300

B)

since the total earnings is higher as a dispatcher , Mr Dowd should sell the taxi and work as Dispatcher

**Purchase of permit is a sunk cost thus irrelevant.

Independent Dispactcher operating Income 30000*2 =60000 27500*2= 55000 Interest forgone 36500*.10*2=7300 Total earnings 60000 62300

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