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Opportunity cost is a basic microeconomics concept, maybe one you learned in a long-ago and hazily recollected 8 a.m. Econ 101 lecture. If you need a refresher, opportunity cost is the benefit you ...
For example, a business that sells tables needs to make annual sales of 200 tables to break-even. At present the company is selling fewer than 200 tables and is therefore operating at a loss. As a business, they must consider increasing the number of tables they sell annually in order to make enough money to pay fixed and variable costs.
The underlying idea is that investors require a rate of return from their resources – i.e. equity – under the control of the firm's management, compensating them for their opportunity cost and accounting for the level of risk resulting. This rate of return is the cost of equity, and a formal equity cost must be subtracted from net income.
The purpose of calculating economic profits (and thus, opportunity costs) is to aid in better business decision-making through the inclusion of opportunity costs. In this way, a business can evaluate whether its decision and the allocation of its resources is cost-effective or not and whether resources should be reallocated.
Today's term: opportunity cost. Simply put, it's what you give up in order to do something. Imagine, for example, that you dream of becoming an engineer or a chef. If you opt to become a chef, you ...
CVP is a short run, marginal analysis: it assumes that unit variable costs and unit revenues are constant, which is appropriate for small deviations from current production and sales, and assumes a neat division between fixed costs and variable costs, though in the long run all costs are variable.
In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly. [1]
In linear programming, reduced cost, or opportunity cost, is the amount by which an objective function coefficient would have to improve (so increase for maximization problem, decrease for minimization problem) before it would be possible for a corresponding variable to assume a positive value in the optimal solution.