Management of Sourwine Corporation is considering whether to purchase a new model 320 machine costing $389,000 or a new model 280 machine costing $318,000 to replace a machine that was purchased 6 years ago for $376,000. The old machine was used to make product C78P until it broke down last week. Unfortunately, the old machine cannot be repaired.
Management has decided to buy the new model 280 machine. It has less capacity than the new model 320 machine, but its capacity is sufficient to continue making product C78P.
Management also considered, but rejected, the alternative of simply dropping product C78P. If that were done, instead of investing $318,000 in the new machine, the money could be invested in a project that would return a total of $405,000.
-In making the decision to invest in the model 280 machine, the opportunity cost was:
A) $376,000
B) $389,000
C) $405,000
D) $318,000

Question

Quizplus · Accepted Answer

The opportunity cost is the potential return from the next best alternative that is foregone. In this case, it is the $405,000 that could have been earned if the money was invested in the alternative project instead of buying the new model 280 machine.

Management of Sourwine Corporation Is Considering Whether to Purchase a New