Action Products is deciding whether to outsource production of a certain component that is included in all of its products. It currently costs Action Products $0.95 to make each component in-house. If Action Products outsources, it can buy the component ready-made for $0.80 each. If Action Products outsources, it could shut down the production facilities it is currently using to manufacture the component, and save $10,000 a year in fixed costs. After analyzing both options, Action Products decided to continue making the component in-house. In the analysis done, which of the following items would be considered an opportunity cost?

Question

Quizplus · Accepted Answer

The opportunity cost refers to the benefits a company misses out on when choosing one alternative over another. In this case, by deciding not to outsource, Action Products misses out on the opportunity to save $10,000 per year in fixed costs, making this the opportunity cost of their decision.

Action Products Is Deciding Whether to Outsource Production of a Certain