Opportunity Costs at University - Assignment Example

Opportunity costs are those values foregone by choosing another course of action. In my case, my opportunity cost is the salary foregone when I decided to take the course. Along the way, I have to make time to attend class and do my homework which I could have spent working and make money. Opportunity costs are always considered in evaluating strategic opportunities. By quantifying the opportunity cost, or the costs that will be given up by choosing a specific alternative, we are able to quantify the costs associated in choosing a specific strategy.

This way, we can determine which course of action can yield the most return by minimizing the opportunity cost. These costs are different. Fixed costs are costs incurred by the business regardless if it will operate or not. They typically include our regular costs such as rent and depreciation. Variable costs are costs that depend on our operation which increases when we increase production and decrease when we reduce production. They usually involve overhead such as electricity and utilities.

An aspiring US businessman once decided to establish a business in Africa. In order to do this, he quits his $120k a year job in the US and used up his savings of $150k to launch the business. After a rough two year stint, he returned to the US with little or nothing to show for his efforts. When asked what the adventure cost him he said 'Thank God. I only lost $150k savings - it could have been worse'. Is this a correct assessment? What is the opportunity cost of his adventure in Africa?The assessment that the businessman only lost $150,000 savings in Africa after two years is wrong.

He also lost the salary that he could have earned ($120,000) had he chose to stay in his previous work. Since he was in Africa for two years, he lost $240,000 ($120,000 x 2 years) plus $150,000 savings. In addition, he also lost the opportunity to receive an additional salary through the annual increase and the interest earned by his $150,000 had he invested it somewhere else.