Kevin lives in the city and doesn't have a car. He takes the bus to work, teaching math in a local high school that pays him $40,000 per year. A similar job has become available in a nearby suburb that pays $50,000 per year. However, he needs a car to get to this job. He figures that he could buy a reliable car with monthly payments of $300. Insurance, parking, tolls, gas and oil will cost an extra $100 per month. Is this a good deal for him financially?

Question

Toby Craig

Business

26 November, 20:36

Kevin lives in the city and doesn't have a car. He takes the bus to work, teaching math in a local high school that pays him $40,000 per year. A similar job has become available in a nearby suburb that pays $50,000 per year. However, he needs a car to get to this job. He figures that he could buy a reliable car with monthly payments of $300. Insurance, parking, tolls, gas and oil will cost an extra $100 per month. Is this a good deal for him financially?

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Answers (1)

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Marcel Lucero · Answer 1

Yes, it is a good deal for him financially.

Explanation:

math teacher's salary = $40,000 per year

similar job in the suburbs pays $50,000 per year

buying a car costs = $300 x 12 = $3,600 per year

additional costs of owning and using a car = $100 x 12 = $1,200

since we are given the amount of time Kevin will spend travelling to the suburbs vs the amount of time he spends going to his school, we cannot include the opportunity costs of the time spent travelling.

Kevin's incremental analysis = $50,000 (new salary) - $40,000 (old salary) - $3,600 (cost of a car) - $1,200 (other expenses) = $5,200

Since the incremental revenue is larger than the incremental costs, then he should take the job.