Opportunity Costs: A Tool to Make Better Business Decisions

• In Event: Emerging and Innovative Research Session

Abstract

Opportunity cost is a component of the collective concept of economic cost, which generally equals the difference between the costs of the desired opportunity and the next best alternative. Economic costs are collectively composed of total costs (fixed plus variable costs), average costs (average fixed costs plus average variable costs), marginal costs, transaction costs, sunk costs, and any other identified accounting costs. Decision makers often make erroneous decisions because they ignore the implicit economic costs necessary to properly apply the opportunity cost model. This article proposes models for calculating opportunity cost, including sunk and implicit costs, which management often considers as irrelevant for decision-making purposes; discusses some strengths and weaknesses of these models; and relates opportunity costs to transfer pricing.

Authors

• Mohamed Bayou, University of Michigan-Dearborn

• Alan Reinstein, Wayne State University

• Gerald H. Lander, University of South Florida-St. Petersburg