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Suppose Jimbo’s Moving Truck business is considering expanding. To decide if expanding isbeneficial to the business, Jimbo wants to conduct a cost-benefit analysis.a) Specify the options or set of alternatives under consideration.b) To implement the expansion Jimbo requires five new employees. Each employee isexpected to be paid $32,000. The cost of interviewing and hiring new employees is$10,000. To ensure the employees are useful to Jimbo’s business he needs to purchasea second truck at the cost of $45,000. The additional resources will increase Jimbo’srevenue by $250,000. In addition to this, Jimbo is expected to receive an additionalbenefit from free advertising on the side of the new truck which he values at $30,000.Conduct the CBA for Jimbo. Determine if Jimbo should expand his business.

Question

Suppose Jimbo’s Moving Truck business is considering expanding. To decide if expanding isbeneficial to the business, Jimbo wants to conduct a cost-benefit analysis.a) Specify the options or set of alternatives under consideration.b) To implement the expansion Jimbo requires five new employees. Each employee isexpected to be paid 32,000.Thecostofinterviewingandhiringnewemployeesis32,000. The cost of interviewing and hiring new employees is10,000. To ensure the employees are useful to Jimbo’s business he needs to purchasea second truck at the cost of 45,000.TheadditionalresourceswillincreaseJimbo’srevenueby45,000. The additional resources will increase Jimbo’srevenue by 250,000. In addition to this, Jimbo is expected to receive an additionalbenefit from free advertising on the side of the new truck which he values at $30,000.Conduct the CBA for Jimbo. Determine if Jimbo should expand his business.

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Solution

a) The options or set of alternatives under consideration are:

  1. Expanding the business by hiring five new employees, purchasing a second truck, and expecting an increase in revenue and additional benefits from free advertising.
  2. Not expanding the business and continuing with the current operations.

b) To conduct the cost-benefit analysis (CBA), we need to calculate the total costs and benefits of the expansion.

Costs:

  • Hiring five new employees: 5 * 32,000=32,000 = 160,000
  • Cost of interviewing and hiring: $10,000
  • Cost of a second truck: 45,000Totalcosts=45,000 Total costs = 160,000 + 10,000+10,000 + 45,000 = $215,000

Benefits:

  • Increase in revenue: $250,000
  • Additional benefit from free advertising: 30,000Totalbenefits=30,000 Total benefits = 250,000 + 30,000=30,000 = 280,000

Net benefit (Total benefits - Total costs) = 280,000−280,000 - 215,000 = $65,000

Since the net benefit is positive, it indicates that the benefits of expanding the business outweigh the costs. Therefore, based on the cost-benefit analysis, Jimbo should expand his business.

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