The opportunity cost of using one unit of the constrained resource in a volume trade-off decision is equal to:
A) the profitability index for the company's best selling product.
B) the profitability index for the product whose production would be cut back if necessary.
C) the profitability index of the product with the fastest growing sales.
D) the profitability index of the company's most profitable product.

Question

Quizplus · Accepted Answer

The opportunity cost in a volume trade-off decision is the potential benefit that is lost by choosing one option over another. Therefore, the correct answer is the profitability index for the product whose production would be cut back if necessary. This is because if a decision has to be made to allocate the constrained resource to one product over another, it would come at a cost of reducing the production of the other product. Hence, the profitability index of that product would indicate the impact of this decision on the company's overall profitability.

The Opportunity Cost of Using One Unit of the Constrained