Opportunity Costs, Explicit Costs and Implicit costs
The opportunity cost of an asset (or, more generally, of a choice) is the highest valued opportunity that must be passed up to allow current use. Opportunity cost ia also called economic opportunity loss. And is the value of the next best alternative foregone as the result of making a decision
Example – I have a TV and VCR. I can either watch a movie or rent TV and VCR.Out of 2 choices, I am selecting one. In this example, If I watch movie, then the opportunity cost of watching the movie would be the amount of rent that I would have earned.
Explicit costs are expenses for which one must pay with cash or equivalent. Because a cash transaction is involved, they are relatively easily accounted for in analysis. These costs are never hidden, one has to pay separately.
Example- Electricity Bill, wages to workers etc.
Implicit costs do not involve a cash transaction, and so we use the opportunity cost concept to measure them. Implicit costs are related to forgone benefits of any single transaction. These are intangible costs that are not easily accounted for.
Example, the time and effort that an owner puts into the maintenance of the company rather than working on expansion.
The Case:
ReplyDeleteIn 2014, Mr. Asad established a transport business in his city and hired a supervisor at Rs. 60,000 per month to look after the business. He himself was working as a Manager in his friend Khurram’s Garment firm. Khurram made an accounting statement of his business. This statement showed that he spent 70% of his total budget to hire the labor, purchasing of material, building and all other inputs which are required for production of garments. He also paid almost Rs. 80,000 per month to Asad as his salary. After one year, Asad decided to leave this job to supervise his own business of transportation as a Supervisor.
Requirement:
Keeping in view the above information, you are required to answer the following question with logical explanation.
o What is opportunity cost for Mr. Asad?
o What is explicit cost of Khurram’s Garment firm?
o What is implicit cost of Mr. Asad’s business?
Explicit cost are labor material building salary
ReplyDeleteThe opportunity cost for mr asad was leaving his transportation business to work as a manager for his friend khurram's garment firm
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