Application of opportunity cost
Posted: Mon Jan 06, 2025 6:03 am
Opportunity cost in business is often viewed through the lens of which investment option will yield the greatest return.
However, this principle can be applied to different resources, such as time, labor, and even commodity items.
Example : A machine broke down in one of the plant's brazil whatsapp phone number departments, resulting in a reduction in production volume: from 10 units of product per day to 6 units. Repairs will take a week and a half.
The options for solving the problem are the following: continue to produce 6 units or invest time and money in repairing the equipment.
The entrepreneur needs to estimate how much profit he will lose in the event of a ten-day downtime.
After this, compare what will be more profitable: to continue producing 6 units or to repair the equipment and return productivity to the previous level.
On the topic: What are strategic initiatives and how to turn internal startups into a company's driving force
The difference between opportunity cost and cash budget
A cash budget is the total amount of expenses required to complete a project or achieve a goal.
Opportunity cost is a concept that reflects the benefits that must be given up when making a particular decision.
Example : Several machines in production need to be repaired.
Management has two options:
use parts for repairs that are already on the company’s balance sheet and perform the work yourself;
order parts from abroad and hire specialists from a third-party organization.
If the owner decides to use the second option, he needs to draw up a budget that will include all expected expenses: the cost of parts, transportation costs and labor costs of specialists.
If the repairs were performed using existing parts and staff, the company would avoid the costs of hiring outside mechanics and minimize the cost of raw materials. These costs are the opportunity cost.
Types of opportunity costs
However, this principle can be applied to different resources, such as time, labor, and even commodity items.
Example : A machine broke down in one of the plant's brazil whatsapp phone number departments, resulting in a reduction in production volume: from 10 units of product per day to 6 units. Repairs will take a week and a half.
The options for solving the problem are the following: continue to produce 6 units or invest time and money in repairing the equipment.
The entrepreneur needs to estimate how much profit he will lose in the event of a ten-day downtime.
After this, compare what will be more profitable: to continue producing 6 units or to repair the equipment and return productivity to the previous level.
On the topic: What are strategic initiatives and how to turn internal startups into a company's driving force
The difference between opportunity cost and cash budget
A cash budget is the total amount of expenses required to complete a project or achieve a goal.
Opportunity cost is a concept that reflects the benefits that must be given up when making a particular decision.
Example : Several machines in production need to be repaired.
Management has two options:
use parts for repairs that are already on the company’s balance sheet and perform the work yourself;
order parts from abroad and hire specialists from a third-party organization.
If the owner decides to use the second option, he needs to draw up a budget that will include all expected expenses: the cost of parts, transportation costs and labor costs of specialists.
If the repairs were performed using existing parts and staff, the company would avoid the costs of hiring outside mechanics and minimize the cost of raw materials. These costs are the opportunity cost.
Types of opportunity costs