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Relevant cost analysis

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Anshu

Student

41 Points Posted on 22 September 2014

I cant understand why the contribution lost on sales which could have been produced if the limiting factor wasnt there, is taken as an oppurtunity cost?

Eg: Possible sale quantity 1000

Possible production qty 800

Contribution per unit 10

Hence oppurtunity cost = 200*10 = 2000 Rs.

Why 2000 is the opportunity cost? Please explain the logic behind it.

Thank you!

Replies (7)

Kishor Bhat

CA final CS executive (from Bangalore)

2018 Points Posted on 22 September 2014

For ex: while choosing other alternative say some contract number 1. By choosing this contract, u r loosing 2000rs profit from contract. So this 2000rs becomes an opportunity cost for contract number 1.

Kishor Bhat

CA final CS executive (from Bangalore)

2018 Points Posted on 22 September 2014

For ex: while choosing other alternative say some contract number 1. By choosing this contract, u r loosing 2000rs profit from contract number 2. So this 2000rs becomes an opportunity cost for contract number 1. i.e profit foregone from an alternative choosen.

Kishor Bhat

CA final CS executive (from Bangalore)

2018 Points Posted on 22 September 2014

Or send me the exact problem.

Kishor Bhat

CA final CS executive (from Bangalore)

2018 Points Posted on 22 September 2014

See in that problem. Whats ur possible sales demand..1000 units. But u r producing only 800 units even if u have order for 1000 units. So u r loosing ur profit to the extent of 200 units. i.e this is nothing but profit foregone .

Kishor Bhat

CA final CS executive (from Bangalore)

2018 Points Posted on 22 September 2014

Later, u would feel like " oh, i lost 200 units order and i have lost profit of Rs.2000". Now u only tel me, whats this 2000rs which u could not able to earn?? ..i.e profit foregone =opportunity cost.

Anshu

Student

41 Points Posted on 22 September 2014

Thank you for replying Kishor. Check the link i have posted below.

This link has the question. Someone else had already asked but the answer is not satisfactory.

/experts/ca-final-costing-1535119.asp#.VB-1KSuSwfM

Kishor Bhat

CA final CS executive (from Bangalore)

2018 Points Posted on 22 September 2014

OK . Ok i wil check this and above one is the proper answer. In costing, it wl be very easy to understand the concepts, if u put urself in a company place.