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Opportunity, direct and indirect costs - Assignment Example

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In the paper “Opportunity, direct and indirect costs” the author analyzes opportunity cost which is used in different circumstances. Any activity which involves value, money or material can generate an opportunity cost, which are calculated based on the best alternative of that activity…

Extract of sample "Opportunity, direct and indirect costs"

﻿Opportunity, direct and indirect costs
Opportunity cost is a broad term which is used in different circumstances. Any activity which involves value, money or material can generate an opportunity cost. Opportunity cost of an activity is usually calculated based on the next best alternative of that activity. Suppose, two world cup football matches; one between Brazil and Argentina and another with England and Germany, are going on simultaneously. I am a football fan and a strong supporter of Argentina team. At the same time, I always like to see tough fights between different teams. Suppose I decided to watch the Brazil – Argentina match at the expense of watching England-Germany match. Using modern technologies, I can definitely record the England-Germany at the time of watching the Brazil – Argentina match. In this case, I am reducing the opportunity cost of losing the live telecast of England-Germany match. However, it is quite possible that the England-Germany match was more interesting and the Brazil – Argentina match was quite boring. In this case, the indirect costs (foregone opportunities) are greater than the direct (out-of-pocket) costs.
Suppose I am going for a tour in a rented car. Imagine the rent for the car per day is \$1000. If I go alone, I have to pay the whole amount myself. On the other hand, if I go along with three other colleagues, I have to pay only 250 dollars per day. In the first case, the marginal cost was \$ 1000 whereas in the second case it was only \$250. In short, the marginal cost of renting a car will be reduced considerably if the number of passengers increases. It should be noted that if I rent the car alone, \$ 750 will be wasted as sunk cost. Read More
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