Question

Max Company uses 20,000 units of Part A in producing its products. A supplier offers to make Part A for $7. Max Company has relevant costs of $8 a unit to manufacture Part A. If there is excess capacity, the opportunity cost of not buying Part A from the supplier is:________

a) $20,000.
b) $0.
c) $160,000.
d) $140,000.

Answer 1

$20,000

Step-by-step explanation:

Max company makes use of 20,000 units of part A to manufacture its product

A supplier offers to produce part A for $7

Max company has relevant costs to $8 per unit to produce part A

Therefore, the opportunity cost of not buying part A from the supplier can be calculated as follows

Opportunity cost= 20,000 units of part A($8-$7)

= 20,000 units×$1

= 20,000×$1

= $20,000

Hence the opportunity cost of not buying part A from the supplier when there is excess capacity is $20,000