Question

We have all heard of the term opportunity cost. Can you briefly describe it? How does it apply to CVP analysis?

Answer 1

Answer)

Opportunity cost the cost of next best alternative. It the amount of benefit from next best alternative forgone in favour of selected alternative course of action.

CVP analysis refers to the analysis which helps to determine the effect of changes in Operating income of the company effected due to any change in cost or volume of products of a company.

Opportunity cost a relevant cost as it is the benefit to be lost due to acceptable of a given offer. Since all relevant costs are a part of CVP analysis, Opportunity cost helps to determine the change in operating income consequent upon selection of a particular alternative.