A student has already completed 2 years of a 4-year degree.
The remaining costs
are:
Annual cost: BDT 120,000
Foregone income: BDT 20,000/month
Expected benefit of completing the degree: Higher salary worth BDT 600,000
(present value).
(a) Calculate the remaining opportunity cost.
(b) Using marginal thinking, should the student continue? Why or why not?
Explain.
(c) Explain why sunk costs should or should not affect the decision. What is the
amount of sunk cost if any?
a) Opportunity cost Using marginal thinking, the student should not
Opportunity cost means the income the student continue, because the cost of continuing is higher
gives up by continuing the degree. than the expected benefit.
Foregone income = BDT 20,000 per month
Remaining period = 2 years = 24 months
Opportunity cost:
BDT 20,000 × 24 = BDT 480,000
Answer: (c) Sunk cost
Opportunity cost = BDT 480,000 Sunk cost means the cost that has already been paid
and cannot be recovered.
The student has already completed 2 years.
(b) Should the student continue? Direct cost already incurred:
Expected benefit from completing the degree = BDT 120,000 × 2 years = BDT 240,000
BDT 600,000 Answer:
Now calculate the total cost of continuing. The sunk cost is BDT 240,000.
Direct cost: Sunk cost should not affect the decision because it
BDT 120,000 × 2 years = BDT 240,000 has already occurred. The student should decide
Opportunity cost: only by comparing the future cost and future
BDT 20,000 × 24 months = BDT 480,000 benefit.
Total cost:
BDT 240,000 + BDT 480,000 = BDT 720,000
Since total cost is BDT 720,000 and benefit is BDT
600,000, the cost is higher than the benefit.
Net benefit:
BDT 600,000 − BDT 720,000 = BDT -120,000
Answer: