Drop a Product/opportunity cost ABC Company produces two products: A grass and B grass.
A Grass B 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 the past year, company devoted 60,000 square yards to A and 60,000 square yards to B grass. Annual fixed costs are $120,000 which the company assigns to products based on relative growing space.
Sam, the chief financial officer of ABC, has suggested that in the coming year, all 120,000 square yards must be devoted to B grass. The president prohibited her suggestion, saying, “I know that right now home construction is booming in our area and we can sell all the grass we can produce, irrespective of what type. But, you know a lot of developers really like that A grass and I’d hate to disappoint them by not offering it.”
Determine the opportunity cost of president’s decision to stick with both kind of grass?