Question

In class we discussed the <Process Selection Matrix> and the necessity of matching product mix and process pattern. In this product-process matrix, different combinations of process patterns and product mix are displayed. Absent a unique strategy, the importance of being close to the diagonal of the matrix was emphasized, because otherwise a company will pay either an "opportunity costs" (being above the diagonal), or “out-of-pocket cost” (being below the diagonal). Please explain those two concepts with your own language.

Answer 1

An out-of-pocket cost can be seen as the cash outlay which could result in the future or any kind of direct payment of the money to the third party which may not be recovered in the future. Or in other words, these are those expenses which are required to be paid in cash during the current financial year. For instance, wages paid to mechanics to rectify a machine

On the other hand, the opportunity cost is not a real payment of cash, it is seen as the cost or sacrifices of the profits or money which could be earned when a certain alternative might be selected over other alternatives.