Hitch Company currently produces 10,000 units of a key part at a total cost of $512,000 annually.Annual variable costs are $300,000.Of the annual fixed costs,$140,000 relate specifically to this part.The remaining fixed costs are unavoidable. Another manufacturer has offered to supply the part for $48 per unit.The facilities currently used to manufacture the part could be used to manufacture a new product with an expected contribution margin of $55,000 annually.Alternatively,the facilities could be rented out at $68,000 annually.If Hitch Company makes the part,what is the annual opportunity cost of the facilities?
A)$13,000
B)$28,000
C)$55,000
D)$68,000

Question

Quizplus · Accepted Answer

The opportunity cost of the facilities is the amount of contribution margin that could be earned if the facilities were used to manufacture the new product. The contribution margin is $55,000, so the opportunity cost is $55,000.

Hitch Company Currently Produces 10,000 Units of a Key Part