Question

1. Explain the term opportunity cost. Select two decisions, one from your personal life and one a common decision that manufacturers face, and provide specific examples of relevant opportunity costs.

2. In a decision about whether to accept or reject a special order, explain why it is important to know whether this a one-off decision.

Answer 1

1. The term opportunity cost can be explained as the money value stuck at one place have an opportunity to be invested somewhere else to get a return.
The same can also be defined as whenever money is invested in one alternative, there is always a loss of other alternatives.

Example from daily life can be taken as whether you can go outside to enjoy yourself up or at the same time you cannot stay at home and complete up with your work.
A common decision that a manufacturer faces is of obtaining raw material as their stock because this decision would make them have a loss of opportunity cost of the money invested in the stock of raw material.

2. While making any decision there is always an alternative which would influence your decision. This would be the opportunity cost or the amount of investment required.
So, while making any decision whether to accept or reject a special order, it is always important to know whether this is a one-off decision because as the decision taken once in such special orders cannot be rejected afterwards.
So there can be likely losses after such decisions taken. So, such special orders are to be researched first.