The Opportunity Cost of Making a Component Part in a Factory

question 123

Multiple Choice

The opportunity cost of making a component part in a factory with no excess capacity is the:

• A) Variable manufacturing cost of the component.
• B) Fixed manufacturing cost of the component.
• C) Total manufacturing cost of the component.
• D) Cost of the production given up to manufacture the component.
• E) Net benefit foregone from the best alternative use of the capacity required.

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Definitions:

Degree of Operating Leverage

A ratio that measures the sensitivity of a company's operating income to a percentage change in revenue.

High-low Method

A technique used in accounting and finance to estimate variable and fixed components of a cost based on the highest and lowest activity levels.

Cost Analysis

The process of assessing the costs involved in carrying out a particular business activity or project.

Variable Expenses

Costs that vary in direct proportion to changes in the level of activity or volume of production.