Question

A company’s unit costs based on 100,000 units are: The normal unit sales price per unit is $165. A special order from a foreign company has been received for 5,000 units at $135 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone. The opportunity cost associated with this order is

Answer 1

Answer: $495,000

Explanation: Opportunity cost can be defined as the cost of profits that were foregone by choosing one alternative over other. It is a part of economic cost and is not considered while calculating the accounting cost.

 In the given case, company has to forego the sale of 3000 units due to the special order production, thus, the lost sale of those 3000 units is the opportunity cost of fulfilling the special order.

This, can be computed as follows :-

opportunity cost = 3000 units * $165

                             = $495,000