What is the opportunity cost of making a component part in a factory given there is an alternative use of the capacity?

Video Transcript

The opportunity cost is the nut benefit foregone from the best alternative views of the capacity here. It's mentioned the there's no alternative use four, the excess capacity, um, the fact that the factory and there is no gain or profit, hence the answer zero.

Chapter 9 Short-term non-routine decisions

MULTIPLE CHOICE

Basic concepts

1. The term relevant cost applies to all of the following decision situations except the

A. Acceptance of special product order.

B. Determination of product price.

C. Manufacture of purchase of a component part.

D. Replacement of equipment. (rpcpa)

1. B

? When is the term relevant cost not applicable.

 The term “relevant cost” refers to those costs and expenses that are used in

making a decision. A cost which is not considered in making a decision is an

irrelevant cost. A cost may be relevant in one decision but may be irrelevant in

another. There are relevant costs used in deciding on whether to accept or reject a

special order, determining a product price, manufacturing or buying a component

part, and replacing or retaining old equipment. There are relevant costs in every

decision made.

The best answer among the choices given is letter ”b”, although there are still

relevant costs in deciding on what is the best selling price for the business.

2. The relevance of a particular cost to a decision is determined by the

A. Size of the cost.

B. Riskiness of the decision.

C. Potential effect(s) on the decision.

D. Accuracy and verifiability of the cost. (cma)

2 C

? The attribute that makes a cost relevant in a decision.

 A cost is relevant when used in making a decision. And a cost is used in decision-

making when it differs from one option to another, and when it deals with the future.

Therefore, the relevance of cost is determined by its potential effect(s) on the

decision. A cost may be relevant in one decision but is irrelevant in another.

Choice-letter “a” is incorrect because the size or amount of a cost does not

measure relevance in decision making but the effects of such cost regardless of

size is relevant. Choice-letter “b” is also incorrect because cost does not reflect the

risk associated with a decision but is more determined by the circumstances

besetting the environment of a certain decision made. Choice-letter “d” is incorrect

because even if such cost is accurate and verifiable but is not used in decision-

making, the same shall be irrelevant and not used in the decision.

3. Relevant or differential cost analysis

A. Takes all variable and fixed cost into account to analyze decision alternatives.

B. Considers only variable cost as they change with each decision alternative.

C. Considers the change in reported net income for each alternative to arrive at

the optimum decision for the company.

D. Considers all variable and fixed cost as they change with each decision

alternative (cma)

What is the opportunity cost of making a component part in a factory given that there is no alternative use of the capacity?

What is opportunity cost in manufacturing?

Which of the following best describes an opportunity cost?

Which of the following costs are relevant to a make or buy decision?