Costs and Opportunity Cost
* Nobel Prize–winning economist Ronald Coase noted,“The cost of doing anything consists of the receipts that could have been obtained if that particular decision had not been taken.” For example, the opportunity set for this Friday night includes the movies, a concert, staying home and studying, staying home and watching television, inviting friends over, and so forth.
The opportunity cost of taking job A included the forgone salary of $102,000 plus the $5,000 of intangibles from job B.
Opportunity cost is the sacrifice of the best alternative for a given action.
Public accounting firms confront this issue.
The car’s opportunity cost in the decision to keep it for resale is $7,200, but in matching expenses to revenues, the accounting expense is $6,500.
Several examples illustrate opportunity costs. The first four examples pertain to raw materials and inventories.
P 2–1: Darien Industries Darien Industries operates a cafeteria for its employees. The operation of the cafeteria[kæfɪ'tɪərɪə] requires fixed costs of $4,700 per month and variable costs of 40 percent of sales. Cafeteria sales are currently averaging $12,000 per month.
Darien has an opportunity to replace the cafeteria with vending [vend] machines. Gross [grəʊs] customer spending at the vending machines is estimated to be 40 percent greater than current sales because the machines are available at all hours. By replacing the cafeteria with vending machines, Darien would receive 16 percent of the gross customer spending and avoid all cafeteria costs. How much does monthly operating income change if Darien Industries replaces the cafeteria with vending machines?
Current cafeteria income Sales $12,000 Variable costs (40% × 12,000) (4,800) Fixed costs (4,700) Operating income $2,500
Vending machine income Sales (12,000 × 1.4) $16,800 Darien's share of sales (.16 × $16,800) 2,688 Increase in operating income $ 188
P 2–2: Negative Opportunity
The opportunity cost of taking job A included the forgone salary of $102,000 plus the $5,000 of intangibles from job B.
Opportunity cost is the sacrifice of the best alternative for a given action.
Public accounting firms confront this issue.
The car’s opportunity cost in the decision to keep it for resale is $7,200, but in matching expenses to revenues, the accounting expense is $6,500.
Several examples illustrate opportunity costs. The first four examples pertain to raw materials and inventories.
P 2–1: Darien Industries Darien Industries operates a cafeteria for its employees. The operation of the cafeteria[kæfɪ'tɪərɪə] requires fixed costs of $4,700 per month and variable costs of 40 percent of sales. Cafeteria sales are currently averaging $12,000 per month.
Darien has an opportunity to replace the cafeteria with vending [vend] machines. Gross [grəʊs] customer spending at the vending machines is estimated to be 40 percent greater than current sales because the machines are available at all hours. By replacing the cafeteria with vending machines, Darien would receive 16 percent of the gross customer spending and avoid all cafeteria costs. How much does monthly operating income change if Darien Industries replaces the cafeteria with vending machines?
Current cafeteria income Sales $12,000 Variable costs (40% × 12,000) (4,800) Fixed costs (4,700) Operating income $2,500
Vending machine income Sales (12,000 × 1.4) $16,800 Darien's share of sales (.16 × $16,800) 2,688 Increase in operating income $ 188
P 2–2: Negative Opportunity