Define the term “opportunity cost.” How may this cost be relevant in a make-or-buy decision?
Sample Solution
Opportunity cost is defined as the benefit or advantage that a person could have received, but gave up due to making another choice. It is the cost of an alternative that must be forgone in order to pursue a certain action. An example of this would be if someone chooses to attend college instead of taking a job; the opportunity cost in this situation would be any money they could have earned from working.
Sample Solution
Opportunity cost is defined as the benefit or advantage that a person could have received, but gave up due to making another choice. It is the cost of an alternative that must be forgone in order to pursue a certain action. An example of this would be if someone chooses to attend college instead of taking a job; the opportunity cost in this situation would be any money they could have earned from working.
Opportunity costs can also play an important role in make-or-buy decisions as it relates to companies deciding whether to produce goods internally or source them externally. In other words, when considering buying versus manufacturing products for oneself, opportunity costs come into effect by helping organizations weigh their options and determine which will yield better results economically or strategically. For instance, Opportunity Cost might include researching costs associated with outsourcing versus hiring employees, inventory storage fees verses production equipment rental etc… Ultimately these considerations allow businesses to make educated decisions on what best suits their needs and resources.
In conclusion, while opportunity cost may not always be easy to calculate – it’s important for organizations consider when weighing different courses of action such as make-or-buy decisions. By understanding potential lost profits upfront they can make more informed financial choices moving forward that best suit their goals and objectives.
