Final answer:
The potential rental value of space in the manufacturing process is an opportunity cost if production is not outsourced because that space could be rented out. It is also a fixed and sunk cost, not a variable production cost. The correct answer is option D.
Step-by-step explanation:
The potential rental value of space used in the manufacturing process is not a variable production cost since it does not change with the level of production. Rather, it is an opportunity cost if production is not outsourced because the space could potentially be rented out to generate income. This cost is also fixed and considered a sunk cost because once a lease is signed, the rental expense must be paid regardless of output levels, and this expense cannot be recovered. Fixed costs like rent on a factory space do not typically play a role in future economic decisions about production or pricing because they cannot be altered in the short run. The correct answer to the student's question would thus be D - it is an opportunity cost if production is not outsourced.