Waterways has discovered that a small fitting it now manufactures at a cost of $
ID: 2497758 • Letter: W
Question
Waterways has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. Waterways has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. Waterways needs 460,000 of these units each year.
If Waterways decides to buy rather than produce the small fitting, it can devote the machinery and labor to making a timing unit it now buys from another company. Waterways uses approximately 500 of these units each year. The cost of the unit is $12.66. To aid in the production of this unit, Waterways would need to purchase a new machine at a cost of $2,345, and the cost of producing the units would be $9.90 a unit.
What is Waterways’ opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit?
Explanation / Answer
Opportunity Cost :-A benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.
Opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit:-
If it chooses to buy the small fitting & manufacture the time unit the opportunity cost is the benefit lost in manufacturing small unit over the purchasing the small unit
Variable cost of mfr pu (1 – 0.2) (A)
0.8
Purchase cost (B)
0.82
Benefit in mfr over purchase (B-A)
0.02
Total benefit lost/Opportunity cost (0.02 * 460000 units)
9200
Variable cost of mfr pu (1 – 0.2) (A)
0.8
Purchase cost (B)
0.82
Benefit in mfr over purchase (B-A)
0.02
Total benefit lost/Opportunity cost (0.02 * 460000 units)
9200
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.