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Division A has variable manufacturing costs of $61 per unit and fixed costs of $14 per...

Division A has variable manufacturing costs of $61 per unit and fixed costs of $14 per unit. Assuming that Division A is operating at capacity, what is the opportunity cost of an internal transfer when the market price is $83?

Multiple Choice

  • $22.

  • $75.

  • $28.

  • $61.

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Answer #1

Opportunity cost is the loss of others alternatives when one alternative is chosen. In the Given case, Fixed cost will not be taken for calculating opportunity cost as it is not relevant for decision making. Division A is selling product in market at $ 83 and its variable cost is $ 61 per unit. Division A has to forgo $83-$61= $22 for internal transfer which Division A could earn.

So opportunity cost is $22.

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