Question

5. You are the manager of Telecall Inc., a small telemarketing company. Your company pays $10,000 per month for office space. A real estate agent has noticed that you are only using 75 percent of your available space and tells you that Telecall could add $800 per month to its bottom line by renting out the space it does not use. Telecall has been asked to do a new telemarketing campaign for a large credit card company, but this would require it to use the remaining office space. What is the opportunity cost of using the extra office space to handle the credit card company's promotion?

Answer 1

Answer: $800

Step-by-step explanation:

Even though your company is using only 75% of the space which means that the company is in effect only using 75% of the rental cost of $10,000, the remaining 25% will not count as opportunity cost because the rent of $10,000 is a fixed cost that is paid on ALL the space and so cannot be separated into costs per space.

The relevant opportunity cost is therefore the amount that the company can get if it decides to sub-let this excess space for $800 because this amount is an extra benefit to be lost if the opportunity is not taken.