Product Z sells for $18 per unit as is, but if enhanced it can be sold for $24 per unit. The enhancement process will cost $50,000 for 10,000 units. If the 10,000 units of Product Z are sold as is without further processing, the company:
A) will incur an incremental profit of $10,000.
B) will incur an opportunity cost of $10,000.
C) will incur an incremental profit of $1 per unit.
D)will incur an incremental loss of $6 per unit.

Question

Quizplus · Accepted Answer

If the 10,000 units of Product Z are sold as is, the company will earn a revenue of $180,000 ($18/unit x 10,000 units). If the company decides to enhance the product, the cost will increase by $5 per unit ($50,000 cost / 10,000 units). Therefore, the total cost per unit will be $23 ($18 original cost + $5 enhancement cost), and the company will earn a revenue of $240,000 ($24/unit x 10,000 units). However, the incremental profit will only be $10,000 ($240,000 - $180,000) because of the $50,000 enhancement cost. Therefore, if the company decides not to enhance the product, it will not incur any additional cost but will miss out on the opportunity to earn an additional profit of $10,000. This is known as an opportunity cost, and the correct answer is B.

Product Z Sells for $18 Per Unit as Is, but If