Use the information below to answer the following question(s).Soft Cushion Company is highly decentralized.Each division is empowered to make its own sales decisions.The Assembly Division can purchase cushion stuffing from the Production Division or from external suppliers.The Production Division has been the major supplier of stuffing in recent years.The Assembly Division has announced that two external suppliers will be used to purchase the stuffing at $20 per kilogram for the next year.The Production Division recently increased its unit price to $40.The manager of the Production Division presented the following information; variable cost $32, fixed cost $8, to top management in order to attempt to force the Assembly Division to purchase the stuffing internally.The Assembly Division purchases 20,000 kg per month.
-The seller of product A has no idle capacity and can sell all it can produce at $20 per unit.Outlay cost is $4.What is the opportunity cost assuming the seller sells internally?
A)$4
B)$16
C)$20
D)$24
E)$44

Question

Quizplus · Accepted Answer

The opportunity cost is the next best alternative foregone. In this case, the Production Division can sell the stuffing externally for $20, but they choose to sell it internally for $32. Therefore, the opportunity cost is $32 - $20 = $12. However, since the Assembly Division is purchasing the stuffing externally for $20, the opportunity cost for the Production Division to sell internally is $20. Therefore, the best choice is for the Assembly Division to continue purchasing externally from the two suppliers for $20 per kilogram, as it is the cheaper option for the company.

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