Analyzing the Opportunity Costs
Answer to classmate:
Explain why the consideration of opportunity costs may be very relevant to a firm. How can opportunity costs affect a business decision? Use an example to support your answer.
Beena Shaji
Aug 11, 2023, 6:34 PM
Ungraded
Hello Sir and Class,
Analyzing the opportunity costs associated with each decision a business makes provides a business with meaningful information that can be used to allocate resources better and minimize risk. Most business decisions usually involve evaluating several alternative courses of action, each presenting different returns for the business in the long term. Analyzing the opportunity costs enables a company to determine the gains that will be missed when making a specific decision (Mankiw, 2020). A business is, as a result, able to select the option that will provide the most value while at the same time minimizing the losses it stands to make from opportunities that were not set. The opportunity cost analysis can, for example, be used to analyze whether expanding operations to a new market would be more valuable in the long term than investing in a new product in the current market. An in-depth analysis of both opportunities can lead to better decisions after considering the losses that will be made for each selected option. Opportunity costs also aid in risk management by providing information on what a business will lose if a risky choice is determined and fails to perform as expected. When considering two options that have different risk profiles, a company may, for example, select to protect its profitability by choosing the less risky option, even if the returns that will be made are lower. It is, therefore, necessary for a business to analyze opportunity costs, which, despite not being part of day-to-day accounting information, can still provide helpful information for decision-making.
References
Mankiw, N. G. (2020). Principles of economics. Cengage Learning.
Jaydon Corby-Potterreplied to Beena Shaji
Hello Beena,
What do you feel that knowing what the opportunity costs are for a company can be vital for their success? There are various courses of action that can be taken in business, and those choices can hold a great deal on the success of the company. Knowing what costs are valuable and what are not necessary help accounting know what needs to be cut out in the next quarter or year on the financial report. The big debate is on the risk-reward options that are out there for a business to take, the higher the risk the higher the payout in most cases, but can leave you hanging dry if it doesn’t pay out. How much risk compared o reward do you feel is vital for a company?
Caldwell, A. (2022, December 15). Why opportunity cost matters. Oracle NetSuite. https://www.netsuite.com/portal/resource/articles/accounting/opportunity-cost.shtml
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