Question

Norman Dowd owns his own taxi, for which he bought a $11,400 permit to operate two years ago. Mr. Dowd earns $34,200 a year operating as an independent but has the opportunity to sell the taxi and permit for $41,000 and take a position as dispatcher for Carter Taxi Co. The dispatcher position pays $32,000 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 $41,000 and can earn a 9 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?

Answer 1

Answer and Explanation:

The computation is shown below:-

a. Opportunity cost = $41,000

b

Working as dispatcher = Dispatcher pays + (Earn Percentage return × Opportunity cost)

= $32,000 + (9% × $41,000)

= $32,000 + $3,690

= $35,690

Yes, Mr Dowd would sell the taxi and accept the position as a role of dispatcher