Identifying Relevant Costs and Calculating Differential Costs
Maria Turner has just graduated from college with a degree in accounting. She had planned to enroll immediately in the master’s program at her university but has been offered a lucrative job at a well-known company. The job is exactly what Maria had hoped to find after obtaining her graduate degree.
In anticipation of master’s program classes, Maria has already spent $450 to apply for the program. Tuition is $8,000 per year, and the program will take two years to complete. Maria’s expected salary after completing the master’s program is approximately $60,000. If she pursues the master’s degree, Maria would stay in her current home that is near the campus and costs $600 per month in rent. She would also remain at her current job that pays $25,000 per year. Additionally, Maria’s immediate family is nearby. She spends considerable time with family and friends, especially during the holidays. This would not be possible if she accepts the job offer because of the distance from her new location.
The job Maria has been offered includes a salary of $50,000. She would have to relocate to another state, but her employer would pay the $5,000 for moving expenses. Maria’s rent in the new location would be approximately $800 per month. The new location is a fast-growing, active city that offers a number of cultural activities that Maria would enjoy. The city is also home to Maria’s favorite Major League Baseball team, and she would expect to buy season tickets.
Required:
1. Help Maria make her decision by categorizing the factors involved in making her choice. Complete the following chart regarding the factors in Maria’s decision. A single factor may have multiple columns checked.
| Relevant | Irrelevant | Sunk Cost | Qualitative |
$450 spent on application fee |
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$8,000 per year tuition |
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$60,000 salary with master’s degree |
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$600 per month current rent |
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$25,000 current salary |
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Time spent with family and friends |
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$50,000 new salary |
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$5,000 moving expenses |
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$800 rent per month in new location |
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Cultural activities in the new location |
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Ability to have MLB season tickets |
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2. For each item following, determine the differential amount in Maria?s alternatives. For example, the incremental cost of tuition is $16,000 if Maria chooses to pursue the master?s degree.
(a) Rent.
(b) Salary for the next two years.
(c) Salary after two years.
(d) Moving expenses.
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