Question

Nancy 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 2, what is the opportunity cost of the idle machine

Answer 1

Answer:

$10,000

Explanation:

The opportunity cost of the idle machine when considering Alternative 2 can be calculated by deducting the benefit from alternative 2 from the benefits of alternative 3

DATA

Benefits from alternative 1 = $50,000

Benefit from alternative 2 = $60,000

Benefit from alternative 3 = $70,000

Net financial benefit from Alternative 3 = Benefit from alternative 3 - opportunity cost

Net financial benefit from Alternative 3  = $70000-60000

Net financial benefit from Alternative 3 = $10000