The opportunity cost of using a unit of the constrained resource in a volume trade-off decision is determined by the profitability index of the product whose production would be cut back as a result of using the constrained resource.

Question

Quizplus · Accepted Answer

The opportunity cost of using a unit of the constrained resource in a volume trade-off decision is not directly related to the profitability index of the product being produced, but rather to the contribution margin of the product that will be sacrificed or cut back. The contribution margin measures the amount of profit that each unit of a product contributes towards covering fixed costs and generating overall profit. Therefore, the opportunity cost of using a constrained resource is determined by the contribution margin of the product that would have to be sacrificed to produce additional units of the other product.

The Opportunity Cost of Using a Unit of the Constrained