Question

A manufacturer invests $30 million in a factory to produce pencils that will earn $2 million in accounting profit per year. assuming the money tied up in the factory could be earning a 10 percent rate of interest in the bank, the manufacturer will bear an opportunity cost (in terms of forgone interest) of

Answer 1

Answer: $3 million

Opportunity cost is the cost of choosing one alternative (10% rate of interest in the bank) over another ($2 million in accounting profit) and missing the benefit offered by the forgone opportunity. Opportunity cost is the benefit that the manufacturer could have received, if he will invest in the bank but gave up, to produce pencils instead. In this case, it is 10% of $30 million which is $3 million.