Question

Dominik Corporation purchased a machine 5 years ago for $527,000 when it launched product M08Y. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 310 machine costing $545,000 or by a new model 240 machine costing $450,000. Management has decided to buy the model 240 machine. It has less capacity than the model 310 machine, but its capacity is sufficient to continue making product M08Y. Management also considered, but rejected, the alternative of dropping product M08Y and not replacing the old machine. If that were done, the $450,000 invested in the new machine could instead have been invested in a project that would have returned a total of $532,000.
In making the decision to invest in the model 240 machine, the opportunity cost was:
$545,000
$450,000
$532,000
$527,000

Answer 1

Answer:

$532,000

Explanation:

The opportunity cost is the cost of the best option rejected.

In this case the option rejected was the investment project that would have returned a total fo 532,000

Therefore, the model 240 should produce a higher profit than 532,000 to reject his project.

The 310 model would have unused capacity as it has more capacity than model 240 but the company will not need to produce as much. So it is discarted from the calculation as it has inefficiency