Question

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A college senior is considering starting a business instead of accepting a job that offers a
$50,000 salary. To determine if there would be demand for the business, the student has spent
$1,000 to survey potential customers. After collecting survey data, the student estimates that the
business would earn $80,000 in revenues per year. The student should start the business if the
annual cost of running the business is less than:
A. $29,000
B. $30,000
C. $79,000
D. $80,000
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Answer: B

Answer 1

Based on the given data, the Senior is having two options infront of him:

- Job opportunity which can offer a salary of $ 50000 per year;

(OR)

- To start a business which is expected to generate revenues of $ 80000 per year;

Basically, these two decisions are mutually exclusive decisions; It means that the Senior has to leave the other option if he choose to opt for one. In this scenarios, incremental approach of earnings is followed to check which is the feasible option;

By comparing both these options, Business seems profitable over Job opportunity to the extent of additional $ 30000 per year; However, $ 80000 as mentioned is only the revenues and not the net profits; Hence, even if the total annual expense is $ 30000, the Business still generate net profits of $ 50000 ( $ 80000 - $ 30000), which is even equal to that of Job opportunity;

However, any amount in excess of $ 30000 will result in the amount of net profits from Business, dropping from $ 50000 levels and at this point of time, the feasibility study fails;

Hence, the answer is (B) $ 30000. The student should start the business, only if the annual cost of running the business is less than $ 30000;

The cost of $ 1000 spent is not required to be considered here as the same is towards the initial survey cost and not an annual recurring expense.