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Ca final doubt

CA Final 680 views 1 replies

How is the opportunity cost calculated?

A company can make any one of the 3 products X,Y or Z in a year. It can exercise its option

only at the beginning of each year.

 
                                                                                              X                             Y                                 Z
SP PER UNIT                                                                   10                             12                             12
VARIABLE COST                                                               6                                 9                               7
MARKET DEMAND(UNITS)                                             3000                       2000                         1000
PRODUCTION CAPACITY(UNITS)                                 2000                       3000                          900
FIXED COST                                                                                                                                            30000
You are required to compute the opportunity costs for each of the products.
 
Answer is 6000 8000 8000 for x y and z
Replies (1)

Here we assumed that company can produce any of the three product in their production  capacity.

Now if company produce X

Then it cannot produce Y and Z

Higher contribution in Y and Z is 2000*3(From Y)= 6000, which is OC

As company will produce higher of production capacity or Market Demand

Now if co. produce Y

Then it can't produce X and Z

Higher contribution in X and Z is 2000*4 (From X)= 8000, which is OC

same way if company produce product Z

Then OC= 2000*4 (From X)= 8000


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