With a 12% required rate of return and a $35 per-unit cost for purchased units, the relevant opportunity cost of capital will be ____________?
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Answer: C. $4.20
Explanation
Multiplying the required rate of return by the unit cost determines the relevant opportunity cost. The calculation multiplies twelve percent by the thirty-five dollar per-unit cost of purchased items. This multiplication accurately results in a relevant opportunity cost of four dollars and twenty cents. Opportunity cost represents the potential benefit foregone when choosing one alternative over another. Required rates of return establish the minimum acceptable percentage return on invested capital assets. Unit costs reflect the direct expenditures required to acquire or manufacture single inventory items.
Corporate finance professionals use opportunity costs when evaluating potential capital budgeting and investment projects. Supply chain managers consider carrying costs and opportunity costs when optimizing inventory holding levels. Understanding capital costs ensures efficient allocation of limited financial resources within business operations. Alternative dollar amounts reflect arithmetic errors or incorrect multiplication of the given rate. Distractors fail to apply the specified percentage correctly to the stated unit purchase cost. Selecting wrong answers shows confusion regarding the calculation of financial opportunity costs.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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