Question

Assume you had invested $1,000 in a lawn mower to set up a lawn mowing business for the summer. During the first week, you could choose either to mow the grounds at a housing development for $1,400 or to help paint a garage for $1,360. Each job would take one week. You cannot do both. You would incur additional costs of $160 for lawn mowing and $80 for garage painting. These costs include $60 under each alternative for transportation to the job. Prepare a schedule showing the net benefit or advantage of selecting one alternative over the other. (This is all information provided)

Lawn mow bus. service Painting garage Differential

Revenues $1,400 $1,360 $40
Cost $160 $80 $80
Net benefit in favor (40)
of lawn service

Answer 1

Schedule showing the net benefit or advantage of Painting over Lawn Mowing:

Lawn Mowing Painting Differential

Revenues $1,400 $1,360 $40

Cost $160 $80 $80

Net benefit $1,240 $1,280 ($40)

in favor of lawn mowing

This implies that Painting garage is more beneficial than lawn mowing.

Step-by-step explanation:

a) Investment in a lawn mower = $1,000

Revenue from mowing grounds at a housing development = $1,400

Revenue from painting a garage = $1,360

Additional costs for lawn mowing = $160

Additional costs for garage painting = $80

Included transportation cost to the jobs = $60 each

b) It costs more (opportunity cost) to mow grounds than to paint a garage. The decision-maker should choose to paint a garage and earn incremental profit of $40 instead of mowing grounds and losing $40.