Opportunity cost is the cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement (InvestorWords, 2009). Or in other words, opportunity costs represent the benefit given up as a result of choosing one option over the other. While they are not cash outlays, they represent an increase in profit for one decision over the other.
ClearHear is a manufacturer of cell phones and its business development specialist, Kendra Sherman, along with the production manager, Lisa Norman, has to make a decision whether to accept an order for a product which requires displacing another product from production.
Big Box has placed an order for 100,000 cell phones and Kendra is anxious to fill the customer's order, but is faced with a dilemma because the current volume ClearHear has is access to 70,000 cell phones in the price range Big Box is willing to pay which is up to $15 per phone.
The end-state goals for ClearHear are to provide their customers with products on time that reliably meet or exceed expectations. ClearHear would additionally like to keep the employees working as well as treat their partners the way they would like to be treated. Kendra would like to fulfill the order providing the best production quality. The problem is that the order must be delivered within 90 days and at current production, ClearHear does not have the volume to complete the order without some alternative solutions.
First, it is essential that the managers diligently...