A company has two manufacturing facilities: one in Alberta that produces a bulk chemical that it sells to many different retailers, and one facility in Ontario that is dedicated to producing a specialty chemical for one client only. The annual profit from the single client is $150,000; and, the profit from the other facility's sales is $1,500,000, after allocating combined fixed costs based on units produced. Another company has offered to lease the Ontario facilities for $250,000. Which of the following is true?
A) The $250,000 is an opportunity cost of continuing to use the Ontario plant.
B) The company incurred a $250,000 opportunity cost for the past years, but this was not recorded on its books.
C) The company needs to determine the contribution margin for each product before making any decision.
D) Incremental revenues exceed total costs if the plant is rented.
E) Incremental costs exceed incremental revenues if the plant is rented.

Question

Quizplus · Accepted Answer

The $250,000 represents the opportunity cost of continuing to use the Ontario plant because leasing it out would generate additional income. An opportunity cost is the forgone income from the next best alternative. In this case, the next best alternative is leasing the Ontario plant for $250,000, which is the amount that the company would lose if it continues to use the plant for its single client. Therefore, the correct answer is A.

A Company Has Two Manufacturing Facilities: One in Alberta That