Question

Juanita earns $67,000 annually as a marketing specialist in Mexico City, Mexico. She has applied for admission to the M.B.A program at Dalhousie University. If accepted, she will resign and move to Halifax, Nova Scotia. Juanita has assembled the following data to make the decision:

Juanita's annual salary	$67,000
Annual tuition and fees	13,000
Annual book and supply expense	3,100
Monthly living expenses in Mexico City	900
Monthly living expenses in Halifax	1,700
Monthly auto expenses in Mexico city	360
Monthly auto expenses in Halifax	360
Cost of two business suits purchased just prior to resigning	610
Moving expenses	5,600

Required:

a) Calculate the following in the context of Juanita's decision:

(i) Total sunk costs (if any) (2 marks)
(ii) Total differential or incremental costs (if any) (6 marks)
(iii) Total opportunity costs (if any) ( 2 marks)

b) What is your best estimate of the total cost to Juanita of earning an M.B.A. degree if it will take her 12 months to complete the program? (5 marks)
c). Suppose you are Juanita. What specific additional information would you need in order to make a rational decision to pursue and successfully complete the MBA program at Dalhousie? Explain. (4 marks)

Answer 1

Answer to Question a(i):

Meaning : A sunk cost refers to money that has already been spent and which cannot be recovered.

In this case, Sunk Cost = Cost of two business suits purchased just prior to resigning

Therefore, Sunk Cost = 610

Answer to Question a(ii):

Meaning : Incremental cost means the cost added by producing one additional unit of a product or service.

In this case, Incremental Cost = Annual tuition and fees + Annual book and supply expense + ( Monthly living expenses in Halifax - Monthly living expenses in Mexico City) + ( Monthly auto expenses in Halifax - Monthly auto expenses in Mexico city ) + Moving expenses

Incremental Cost = 13000 + 3100 + (1700-900) + (360-360) +5600

Incremental Cost = 22500

Answer to Question a(iii):

Meaning : Oppurtunity Cost Means the loss of other alternatives when one alternative is chosen.

In this case, Oppurtunity Cost =  Juanita's annual salary

Oppurtunity Cost = 67000

Answer to Question b:

Juanita's total cost to complete M.B.A. = 13000 + 3100 + (1700*12) + (360*12) + 5600

Total Cost = 46420

Answer to Question c:

Following Other factors are also important in order to make a rational Decision:-

1) Family Conditions

2) What will be the benefit of having MBA (Extra Salary) ?

3) Is there is any scope of Increment or promotion in current Position ?

4) Phychological Factor relating to changes and new people.

5) Social Life in mexico