Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $360,000 or a new model 220 machine costing $340,000 to replace a machine that was purchased 7 years ago for $348,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired.Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L.Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $340,000 in the new machine, the money could be invested in a project that would return a total of $411,000.In making the decision to invest in the model 220 machine, the opportunity cost was:
A) $348,000
B) $340,000
C) $360,000
D) $411,000

Question

Quizplus · Accepted Answer

The opportunity cost is the value of the next best alternative that is foregone by choosing a particular action. In this case, by choosing to invest in the new model 220 machine, the company foregoes the opportunity to invest the $340,000 in a project that would return $411,000. Therefore, the opportunity cost is the difference in return, which is $411,000.

Management of Plascencia Corporation Is Considering Whether to Purchase a New