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CA Intermediate · Cost and Management Accounting · Introduction to Cost and Management Accounting

Priya Foods Ltd. has a machine that can be used to make Product A, giving a contribution of Rs 90,000, or Product B, giving a contribution of Rs 1,20,000, or be rented out for Rs 75,000. The company chooses Product B. Assuming these are the only alternatives, what is the opportunity cost of choosing Product B?

The opportunity cost is Rs 90,000, the contribution from Product A. Opportunity cost is the benefit of the best alternative given up, and between Product A at Rs 90,000 and renting at Rs 75,000, Product A is higher. Alternatives are not added together.

  1. ARs 75,000
  2. BRs 90,000Correct
  3. CRs 1,65,000
  4. DRs 30,000

Explanation

Opportunity cost is the value of the best alternative forgone. The alternatives to B are Product A at Rs 90,000 and renting at Rs 75,000. The best forgone is Rs 90,000. Rs 1,65,000 wrongly adds both forgone alternatives, while Rs 30,000 is the net advantage of B over A, not the opportunity cost.

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