Costs and Opportunity Cost

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* 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 Costs
Can opportunity costs be negative? Give an example.

Yes,if your house basement have broken and need spend you 1000 dollars to repair. If you decide to buy it to someone who do like use the basement. You opportunity cost is -1000 dollars. P 2–5: J.P. Max Department Stores

J.P. Max is a department store carrying a large and varied stock of merchandise. Management is considering leasing part of its floor space for $72 per square foot per year to an outside jewelry company that would sell merchandise. Two areas currently in use are being considered: home appliances (1,000 square feet) and televisions (1,200 square feet). These departments had annual profits of $64,000 for appliances and $82,000 for televisions after allocated fixed occupancy costs of $7 per square foot were deducted. Allocated fixed occupancy costs include property taxes, mortgage interest, insurance, and exterior maintenance for the department store. Required:

Considering all the relevant factors, which department should be leased and why?

[Opportunity cost of retail space]
Home Appliances Televisions
Profits after fixed cost allocations $64,000 $82,000
Allocated fixed costs 7,000 8,400
Profits before fixed cost allocations 71,000 90,400
Lease Payments 72,000 86,400
We would rent out the Home Appliance department,
P 2–10: Emrich Processing
Emrich Processing is a small custom stainless steel parts processor. Customers send new and used stainless steel parts to Emrich for cleaning in various acid baths to remove small imperfections or films on the surface. These parts are used in a variety of applications, ranging from nuclear reactors to chemical and medical applications. Depending on the foreign substance to be removed, Emrich chooses the acid bath mixture and process. Such chemical cleaning operations require highly skilled technicians to handle the dangerous acids. Environmental Protection Agency (EPA) and Occupational Safety and Health...
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