Determine Opportunity Costs

A company has material B in stock that originally cost Shs. 5000 for the 1000 Kshs in stores. The material is missing over from an old purchase order. The company is still considering employing it on contract X. The alternative course of action to utilizing material on contract X is as:

a) 600 kg could be employed in contract Y instead of buying similar material at Shs. 3 per kg.

b) A further 250 kg could be sold like scrap at Shs. 1 per kg

c) The remainder will have to be disposed at a cost 50 pence per kg

Required

Prepare a summary that shows the opportunity cost of utlizing material B on contract X

Solution

The information may be presented in more than one way. An approach that focuses on each individual cash flow for each alternative is useful where the decision making condition becomes more complex, since it adopts a detailed analysis, that is easy to follow. Alternatively, the net costs and benefits may be summarized for employ in the alternative option decision.

The opportunity cost net outflow if material B is essential on contract X is Shs. 1975 . Utilizing a net costs and benefits summary if material B is used on contract X: