Question

I am having trouble determining how or when an Opportunity cost comes into play when calculating the differential analysis.

Answer 1

Differential analysis involves analyzing the different costs and benefits that would arise from alternative solutions to a particular problem.

Opportunity Cost is the potential benefit that is forgone by not following the next best alternative course of action.

Opportunity cost comes into play in the application of differential analysis. In make or buy decision management consider the opportunity cost. Sometimes, the cost to manufacture may be less than cost of purchasing the part of material. On the other hand, sometimes the cost of purchasing may be less than the cost to manufacture.