Question

Explain why the consideration of opportunity costs may be very relevant to a firm. How can opportunity costs affect a business decision?

Answer 1

Answer:

Importance : Opportunity cost is lost Contribution

Effect : Opportunity cost increases the variable costs of the decision that has been chosen

Explanation:

Opportunity Cost is a lost contribution. Contribution is calculated as Sales less Variable Costs.

Considering opportunity costs is very relevant to a firm because it constitutes part of the money lost that cold have been earned when another alternative course of action is chosen over another. The opportunity cost would have been the revenue for the disregarded option.

So opportunity cost increases the variable costs of the decision that has been chosen.