Management of Childers Corporation is considering whether to purchase a new model 380 machine costing $278,000 or a new model 230 machine costing $207,000 to replace a machine that was purchased 3 years ago for $266,000. The old machine was used to make product R16K until it broke down last week. Unfortunately, the old machine cannot be repaired. Management has decided to buy the new model 230 machine. It has less capacity than the new model 380 machine, but its capacity is sufficient to continue making product R16K.
Management also considered, but rejected, the alternative of simply dropping product R16K. If that were done, instead of investing $207,000 in the new machine, the money could be invested in a project that would return a total of $305,000.
In making the decision to invest in the model 230 machine, the opportunity cost was:
A)$278,000
B)$305,000
C)$207,000
D)$266,000

Question

Quizplus · Accepted Answer

The opportunity cost is the return that could have been earned on the best alternative that was rejected. In this case, the best alternative was to invest the $207,000 in a project that would return a total of $305,000. Therefore, the opportunity cost of investing in the model 230 machine is $305,000.

Management of Childers Corporation Is Considering Whether to Purchase a New