This refers to the cost of the next best alternative. The decision maker should determine all the possible actions and their net receipts foregone to identify the highest net flow among them.
Therefore, the opportunity cost changes as the set of opportunities changes.
As given, the opportunities available are watching V opera or M concert. Therefore, attending V opera indicates that user is sacrificing M concert. The amount of satisfaction sacrificed by not opting for M concert is the opportunity cost.
Though the user is willing to pay $200 to watch M concert, yet the opportunity cost will be the cost payable to watch the concert, which is $160.
Therefore, the opportunity cost by attending the V opera amounts to
It is the income foregone which could have earned if the current task has not opted. Since an opportunity of income is forgiven it is termed as opportunity cost. A famous person once said, "Not coming of money is equivalent to going of money".
This refers to that the income you have forgiven is now a cost which should be recovered from the adopted task. If it is not recovered then there is ultimately loss of the amount not recovered.The company interrupts the regular programming twice a year. It is considering that raising fund through this is very cheap but does not consider the loss due to the interruption from the regular programming.
If that loss is also added up this cost may not be too cost effective. Hence before considering it cost effective the opportunity cost must be considered because if it is not considered then it might lead to incurring higher cost.
Variable and Fixed Cost
There are two components in cost of a product from the point of the manufacturer. One is the fixed cost which remain fixed at any level of sales and one is the variable cost which is directly propionate to the level of sales. If the quantity increases variable cost increases and quantity decreases the variable cost also decreases. Variable costs are relevant cost and fixed cost are irrelevant costs.
The given statement is false. There is no doubt that the total profit would increase but the increase will not be because of the spread of fixed costs among more units.
Fixed cost is a sunk cost. When the quantity increases the profit will increase which represents the difference of sale price and the variable cost. Here the concept of marginal profit will apply and not the average profit. Thus the profit will increase whether there is any fixed cost or not. Fixed cost will not affect the profit.