A supplier offers to make Part A for $35. Altec Company has relevant costs of $40 a unit to manufacture 1,000 units of Part A. If there is excess capacity, the opportunity cost of buying Part A from the supplier is:
A)0
B)$40,000
C)$35,000
D)indeterminable

Question

Quizplus · Accepted Answer

The opportunity cost is the benefit forgone by choosing one option over the other. In this case, if Altec Company chooses to buy the part from the supplier, they would save $5 per unit. However, since there is excess capacity, Altec Company would still incur the relevant costs of $40 per unit if they choose to make the part themselves. Therefore, the opportunity cost of buying from the supplier is 0, as Altec Company does not give up any benefits by making the part themselves.

A Supplier Offers to Make Part a for $35