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CBAP · Question #73

A business analyst is helping management determine which solution they should choose. As it happens that the organization can only choose one of the two solutions due to time and resource…

The correct answer is A. $565,000. Opportunity cost is the value of the best alternative that was not chosen. Since Solution B ($565,000) was foregone in favor of Solution A, the opportunity cost equals the full value of Solution B.

Strategy Analysis

Question

A business analyst is helping management determine which solution they should choose. As it happens that the organization can only choose one of the two solutions due to time and resource restrictions. Solution A worths $456,000 to the organization while solution B worths $565,000 to the organization. While solution A costs less, it is less risky and takes less time to complete so management elects to seize Solution A. What is the opportunity cost?

Options

  • A$565,000
  • BThere is not enough information to know how much the solution will cost the organization.
  • C$109,000
  • D$456,000

How the community answered

(39 responses)
  • A
    72% (28)
  • B
    3% (1)
  • C
    18% (7)
  • D
    8% (3)

Why each option

Opportunity cost is the value of the best alternative that was not chosen. Since Solution B ($565,000) was foregone in favor of Solution A, the opportunity cost equals the full value of Solution B.

A$565,000Correct

Opportunity cost represents the value of the best foregone alternative. Management chose Solution A and gave up Solution B, which was worth $565,000 to the organization - that forgone value is the opportunity cost, regardless of what Solution A costs or the difference between the two.

BThere is not enough information to know how much the solution will cost the organization.

There is sufficient information provided - the value of both solutions is explicitly stated, which is all that is needed to calculate opportunity cost.

C$109,000

$109,000 is merely the incremental difference in value between the two solutions ($565,000 - $456,000), not the opportunity cost - opportunity cost equals the full value of the rejected alternative.

D$456,000

$456,000 is the value of Solution A, the option that WAS chosen - opportunity cost is defined as the value of the option that was NOT chosen.

Concept tested: Opportunity cost of a foregone solution alternative

Source: https://www.investopedia.com/terms/o/opportunitycost.asp

Topics

#opportunity cost#solution selection#decision analysis#cost analysis

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