Hey beautiful people I have a question where I'm looking for some clarification below: Is the 10k the opportunity cost because its lower amount or because it wasn't selected?
Jones Corp. had an opportunity to use its capacity to produce an extra 5,000 units with a contribution margin of $5 per unit, or to rent out the space for $10,000. What was the opportunity cost of using the capacity?
a.
$35,000
b.
$25,000
c.
$10,000
d.
$15,000
Explanation
Choice “c” is correct. The opportunity cost is $10,000, the value of the next best use of the space. The alternative selected carries a contribution margin of $25,000 and the next best use is renting the space for $10,000.
Choice “a” is incorrect. The opportunity cost is not the combined value of the alternative selected and the next best use.
Choice “b” is incorrect. The opportunity cost is the next best use of the productive capacity ($10,000), not the best use of the capacity ($25,000).
Choice “d” is incorrect. The opportunity cost the next best use of the productive capacity ($10,000), not the difference between the best and next best alternatives ($25,000 – $10,000).
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