Question

Cost Behavior

Costs are classified according to the type of analysis that is being done. Suppose you were offered a job making $50,000 annually after you received your undergraduate degree. However, you made a decision to get your MBA in 2 years rather than taking the job. You will incur tuition, books and living costs for these 2 years.

REQUIRED:

• What costs are relevant to your decision? Note that some costs relevant to a decision may not be quantitative.  
• What  is the opportunity cost of this decision.

Answer 1

We can classify relevant costs as follows:

1. Avoidable costs : Costs that are avoidable if that decision is not taken.

2. Opportunity costs : Cash inflow that will be lost if that decision is made.

3.Incremental costs : incremental or decremental costs where alternatives available.

4.Cash inflows : future cash flows if that decision is made.

In this case costs of Tution , books and all other costs to get MBA and opportunity cost should be considered as relevant costs. However living costs will be there weather there is to get MBA or not , so it should not be considered as relevant.

In this case opportunity cost is nothing but income which is lost because of getting MBA which is $50,000 P.A , So for 2 years Opportunity cost is $50,000*2 = $ 100,000.