Question

John makes a scent according to a traditional Spanish recipe, which normally sells at €9 (Euros) per unit. Normal production volume is 10,000 ounces per month, and the maximum capacity is 10,800 ounces per month. Average cost is €5 per ounce, of which €2 is direct material and €1 is variable conversion cost (direct labor + variable conversion cost). This product is seasonal. After July, demand for this product drops to 6,000 ounces monthly.

In July, Lago offers to buy 1,800 ounces for €8,100. If John accepts the order, he must design a special label for Lago at a cost of €800. Each label will cost 30 cents to make and apply.If John accepts the order, she will turn away regular customers who order 800 ounces.

Which of the following statements is correct?

• A. The opportunity cost of rejecting the offer is €4,800
• B. The opportunity cost of accepting the offer is €1,360
• C. The opportunity cost of accepting the offer is €7,500
• D. The opportunity cost of rejecting the offer is €1,375

Answer 1

Correct Option A. The opportunity cost of rejecting the offer is €4,800
Opportunity cost is the benefit forgone from second alternative due to acceptance of another alternative.
Here in the given case, If john accept the order it will forgone the contribution on regular customers who orders 800 ounces
Calculation of Contribution margin
Selling Price	9
Less: Direct material	2
Less: Variable Cost	1
Contribution per unit	6
Total contribution forgone	4800