Harrison Company determines that an opportunity cost of an alternate course of action is relevant to a make-or-buy decision.Which statement is true of the opportunity cost?
A)should be added to the "buy" costs
B)should be subtracted from the "make" costs
C)should be added to the "make" costs
D)should be ignored if it does not involve a cash outlay

Question

Quizplus · Accepted Answer

Opportunity cost is the cost of the best alternative foregone when a decision is made. In a make-or-buy decision, the opportunity cost is the potential profit or savings a company could have earned by choosing the alternative option. Therefore, the opportunity cost should be added to the "make" costs as it reflects the potential earnings forgone by choosing to make the product rather than buying it.

Harrison Company Determines That an Opportunity Cost of an Alternate