Question

7) Marjorie Company has an idle machine that originally cost $200,000. The book value of the machine is $100,000. The company is considering three alternative uses of the idle machine:

Alternative 1: Disposal of machine. Disposal value of machine is $50,000.

Alternative 2: Use the idle machine to increase production of Product A. Contribution margin from additional sales of Product A is estimated to be $60,000.

Alternative 3: Use the idle machine to increase production of Product B. Contribution margin from additional sales of Product B is estimated to be $70,000.

When considering Alternative 3, what is the opportunity cost of the idle machine?

A) $50,000

B) $60,000 this is the correct answer, please explain why!

C) $70,000

D) $110,000

Answer 1

The correct answer is option B i.e. $60,000.

Explanation

Opportunity cost is the cost of 2nd best alternative available when the first one is chosen.

In the given problem When we are considering the Alternative 3 the opportunity cost of the idle machine will be higher of Opportunity cost of alternative 1 and alternative 2.

In Alternative 1

Opportunity Cost = $ 50,000 (i.e. Disposal value of the machine)

In Alternative 2

Opportunity Cost = $ 60,000 (i.e. Contribution margin from sales)

So the Higher of the above two is $ 60000 hence the opportunity cost will be 60000 while considering alternative 3.

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