When a decision is made in an organization, it is selected from a group of alternative courses of action (i.e., decision alternatives). The loss associated with not choosing a given decision alternative is referred to as a(n):
(a) Sunk cost.
(c) Opportunity cost.
(d) Committed cost.
(e) Outlay cost.
Opportunity costs refer to the value forgone when a certain decision is made sacrificing the potential revenue or income to be earned from another activity.
Answer and Explanation:
The answer is (c) Opportunity cost.
- Sunk costs are costs already incurred therefore not considered during the decision process.
- Discretionary costs are costs that can be eliminated without a significant impact on the short-term.
- Committed costs are costs that are already locked in for the next periods, these costs cannot be avoided since the business is already obliged to spend for such costs.
- Outlay costs are costs incurred upon undertaking a certain activity.
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from Economics 102: MacroeconomicsChapter 1 / Lesson 3