Question

Suppose your expenses for this term are as​ follows: tuition:​ $28,000, room and​ board: $9,000, books and other educational​ supplies: $2,500.​ Further, during the​ term, you can only work partminus−time and earn​ $16,000 instead of your fullminus−time salary of​ $42,000. What is the opportunity cost of going to college this​ term, assuming that your room and board expenses would be the same even if you did not go to​ college? A. ​$36,500 B. ​$56,500 C. ​$65,500 D. ​$72,500

Answer 1

Answer: Option C is correct

Explanation:

Opportunity cost or loss is the contribution lost due to the leaving one opportunity to exploit the other one. So in this case, the opportunity that I am going to exploit is going to college this term. So according to relevant costing the relevant cost is:

(a) Cash flow in nature.

(b) Future contract binding (future related)

(c) Incremental cost or differential cost

To find whether the cost is incremental cost or not we can find through the following method.

Step 1: Find the cash flow that is arising due to the decision?

Step 2: Find the cash flow arising if we don't take the decision?

Step 3: The difference of step 1 and 2 is differential or incremental cost.

All the inflows and outflows are cash flow in nature and future related. The only thing we have to find is that whether or not the cost is incremental or not.

For this Term:

                                                    Step 1              Step 2             Step 3

                                             Take Decision    If we Don't     Incremental

Salary loss (42-16)                    (26,000)                -                   (26,000)

Tuition cost                               (28,000)                -                   (28,000)

Room and Board                       (9,000)                 -                    (9,000)

Books and Edc. Supplies          (2,500)                 -                    (2,500)

TOTAL COSTS                                                                            (65,500)

Kindly also review the following question for you better understanding

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