A recent graduate turns down a job offer of $30,000 per year to start his own bu
ID: 1231832 • Letter: A
Question
A recent graduate turns down a job offer of $30,000 per year to start his own business. He will invest $50,000 of his own money, which has been in a bank account earning 7 percent interest per year. He also plans to use a building he owns that has been rented at $1500 per month. Revenue in the new business during his first year was $107,000. He incurred the following expenses: advertising $5,000; materials $10,000; taxes $5,000; labor costs $40,000; supplies $5,000. Prepare two simple income statements, one using the traditional accounting approach and the other using the economic approach considering all opportunity costs. Did the graduate make a good decision? Explain.Explanation / Answer
Accounting Approach Total revenue = $107,000 Total expenses = $65,000 Net income = $107,000 - $65,000 = $42,000 Opportunity Cost Approach Total revenue = $107,000 Total expenses = $65,000 + Job Offer $30,000 7% interest p/a 50000 * 0.07 = $3,500 rent $1,500 * 12 = $18,000 Total expenses = $65,000 + $30,000 + $3,500 + $18,000 = $116,500 Net Income = $107,000 - $116,500 = -$9,500 Yes!