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Q1) Drop a Product/opportunity cost Midwestern Sod Company makes two products: fescue grass and Bermuda grass.

 

 

Fescue Grass

Bermuda Grass

Selling price per square yard

$2.00

$2.85

Less variable cost per square yard (water, fertilizer, maintenance)

0.55

1.15

 

 Company has 120,000 square yards of growing space available. In past year, company dedicated 60,000 square yards to fescue and 60,000 square yards to Bermuda grass. Annual fixed costs are $120,000 which company assigns to products based on relative growing space.

 

Martha Lopez, chief financial officer of Midwestern sod, has suggested that in coming year, all 120,000 square yards should be devoted to Bermuda grass. President vetoed her suggestion, saying, "I know that right now home construction is booming in our area and we can sell all grass we can make, irrespective of what kind. But, you know lot of developers really like that fescue grass and I'd hate to disappoint them by not offering it."

 

Required

 

Determine the opportunity cost of president's decision to stick with both kinds of grass?

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