Question

Dechico Corporation purchased a machine 3 years ago for $456,000 when it launched product G92L. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 330 machine costing $474,000 or by a new model 260 machine costing $418,000. Management has decided to buy the model 260 machine. It has less capacity than the model 330 machine, but its capacity is sufficient to continue making product G92L. Management also considered, but rejected, the alternative of dropping product G92L and not replacing the old machine. If that were done, the $418,000 invested in the new machine could instead have been invested in a project that would have returned a total of $496,000.
In making the decision to invest in the model 260 machine, the opportunity cost was _______.

Answer 1

Answer:

the $490,000 that an alternative project could have returned.

Explanation:

Opportunity costs are the costs (or benefits lost) from choosing one alternative activity or investment over another.

In this case, if Dechico decides to continue to produce product G92L, it will not be able to invest in the new project that could have generated a $496,000 return.