What is opportunity cost?

[sadiksojib35]

In simple terms, the concept of opportunity cost is the best option we could choose instead of the current decision. It is a kind of “price tag” on alternative possibilities that we are not currently pursuing.

Calculating alternative cost allows you not only to avoid brazil whatsapp phone number lost profits, but also to make better decisions to increase profits. Irina Remneva, CFO of Neskuchnye Finansy, told us more about what alternative cost is.

Subscribe to RB.RU in Telegram
Content

The concept of opportunity cost
Calculation formula
Application of opportunity cost
The difference between opportunity cost and cash budget
Types of opportunity costs
Errors in calculation
Cost curve
How Opportunity Cost Is Applied in Life


The concept of opportunity cost
Opportunity cost is a concept that is often discussed in economics and finance. It is also often confused with the concept of opportunity cost. Although both terms involve resource decisions and potential losses, there are important differences between the two.

Example #1 . You decide to invest in securities. The opportunity cost is what you could have earned by depositing them in a bank account. The lost profit occurs after the fact, it is a real loss.

Example #2 . You invested in securities, and they began to fall in price. The lost profit here is that, by choosing another investment option, you could have made a greater profit.


Регистрация компании в Дубае. Быстро и конфиденциально.
Анализ бизнес-гипотез. Регистрация. Лицензирование. Поддержка на всех этапах.
Ad

sorp.ae

RB.RU organizes a meeting of the Founders' Mondays project for beginning and experienced entrepreneurs. Twice a month on Mondays.

Calculation formula
Let's look at how to determine the alternative cost. This can be done in different ways, which we will look at below.

Opportunity Cost (OC) = Costs + Lost Profits

Example : A business owner faces an important choice: what product to import from China: phones or cases for them.

One phone costs 10,000 rubles, and its potential retail price is 15,000. When delivering 500 phones, the total logistics cost will be 30,000 rubles. In this case, AC = 7,530,000 rubles (30,000 + 15,000 × 500).

Now let's calculate the alternative cost of the covers. One cover costs 500 rubles, and the selling price is 1,500. For the same 30,000, you can send 4,000 covers. It turns out that the AC of the covers = 6,030,000 rubles (30,000 + 1,500 × 4,000).

Although the potential profit from selling phones is more impressive, choosing cases will reduce investments. Realizing that with less investment the business will be easier to develop, the owner gives preference to cases.

Let's look at another formula for calculating alternative cost.

Opportunity Cost (OC) = Cost + Hourly Cost x Time Spent

An example of a problem on alternative cost using such a formula is considered below.

Imagine a businessman rushing to an important meeting with a supplier. He has two options: to get to the meeting place by metro or by taxi. The metro ride will cost 80 rubles and will take 1 hour.

Taking into account his average earnings of 2,500 rubles per hour, the maximum alternative cost of the trip will be: AC = 80 + 1 x 2,500 = 2,580 rubles.

On the other hand, a taxi costs 1,000 rubles, and the travel time is 30 minutes. AC in this case will be: AC = 1,000 + 0.5 × 2,500 = 2,250 rubles.

At first glance, taking a taxi is more profitable. However, if you choose this alternative cost solution, the car may get stuck in a traffic jam, which will lead to a delay and, possibly, being late for a meeting.

It turns out that alternative cost choices should be based not only on cost, but also on how the chosen option will affect the business. Punctuality and reliability may be more important than savings.