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CMA Intermediate · Cost Accounting · Introduction to Cost Accounting

Sundaram Textiles plans to use a machine already owned, which could otherwise be rented out for Rs 60,000 a year. When the machine is used for a special order, the rent forgone is best classified as:

The forgone rent is an opportunity cost. It is the benefit of the best alternative, renting the machine out, that is given up when the machine is used for the special order. Sunk costs, by contrast, are past costs unaffected by the decision.

  1. ASunk cost
  2. BOpportunity costCorrect
  3. CCommitted cost
  4. DControllable cost

Explanation

Opportunity cost is the value of the next best alternative given up by choosing a course of action. The Rs 60,000 rent forgone is the benefit lost by using the machine for the order. A sunk cost is already incurred and cannot be changed by the decision.

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