Dechico Corporation purchased a machine 3 years ago for $456,000 when it launched product G92L. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 330 machine costing $474,000 or by a new model 260 machine costing $418,000. Management has decided to buy the model 260 machine. It has less capacity than the model 330 machine, but its capacity is sufficient to continue making product G92L. Management also considered, but rejected, the alternative of dropping product G92L and not replacing the old machine. If that were done, the $418,000 invested in the new machine could instead have been invested in a project that would have returned a total of $496,000. In making the decision to invest in the model 260 machine, the opportunity cost was:
A)$418,000
B)$456,000
C)$474,000
D)$496,000

Question

Quizplus · Accepted Answer

The opportunity cost is the potential return from the next best alternative that is foregone. In this case, it is the $496,000 that could have been earned if the $418,000 were invested in the alternative project instead of buying the model 260 machine.

Dechico Corporation Purchased a Machine 3 Years Ago for $456,000