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Good evening, Sir.
The question states the component sold makes a unit cost of $20. Next year production and sales estimated at 40k units fall by 20% each year for following 3 years.
Could you kindly explain why is it deemed as opportunity cost?
Is it due to the decline of number of units?
I would appreciate if you are willing to allocate your time on answering this as I am not good in opportunity cost.
Thanks and Regards.
An opportunity cost is lost income as a result of doing the new investment.
In this question, if they do move the production to Gamala then they will lose income that they would have been making if they had continued production of the X-IT in the USA.
This lost income is therefore an extra cost of moving the production to Gamala.
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