It’s the next best alternative to a particular option that’s been executed or is about to be executed. Usually, it’s an overseas investment project.

Or a choice made by a bunch of people or a single person. To get the value of the decision made, we need to know how to calculate opportunity cost in theboomoney.

The formula for opportunity cost 2022 is:

Opportunity Cost = Total Revenue – Economic Profit.

Opportunity Cost = What One Sacrifice / What One Gain.

How to calculate opportunity costs?

Formula Examples For Opportunity Costs

For a better understanding of the Opportunity Cost formula, let’s look at a simple example.

Opportunity Cost Formula – Example #1

A furniture maker will be given two orders; he can take one. The manufacturer has to choose between the two orders, paying 100 rupees an hour for his labor.

1st order: One table at 7500 rupees. It’ll take 16 hours, and raw materials cost 1800.

I’m selling two chairs for INR 4000 each. I use 500 nails for each chair. I use 800 nails for the second chair. The total raw material cost is 800 INR.

The formula for opportunity cost in 2022

Find out the better option and the opportunity costs he misses?

Solution:

As the manufacturer has two orders, we’ll have to calculate the profit for each order separately.

Make money from the first order.

Total Revenue – Economic Profit = Opportunity Cost

The first order is 7500 minus ((16 * 100) + 1800)

INR (7500 – 3400)

1st order = 4100

Profits from second order

INR (4000 x 2) – [(11 x 2 x 100)+ (800 x 2)] Second Order

= INR 8000 – 3800

2nd Order = INR 4200

Order No. 2 will yield a much higher profit for the manufacturer (INR 4200 versus INR 4100)

A manufacturer will have to lose 4100 rupees as an opportunity cost during the course of his business. He can only take one order at a time, so he will opt for the second order.

Opportunity Cost Formula – Example #2

There are three orders waiting to be fulfilled. Let’s start with the most profitable one. The two least profitable orders go first. Here’s what the passage means: People should be encouraged to get involved in extracurricular activities at school or in their spare time for five reasons. -a) Develop and maintain positive relationships with peers and adults

Order #1: 100 cars for INR 4.5 lakh each, RM costs – INR 80 lakhs, total labor costs – INR 22 lakhs

Order 2: 50 cars with a selling price of INR 8 lakh each, RM costs of INR 95 lakhs, labor costs of INR 45 lakhs

Order 3: 20 trucks at an average selling price of INR 22 lakh each, RM costs of INR 1.12 Cr, the total labor cost of INR 38 lakh

Solution:

We should calculate the profitability for each case based on the previous problem. Sales are cash-based, so more earnings mean higher cash flow, which means fewer short-term loans, which means less pressure on working capital.

First-order profitability

The first order is INR (4, 50, 000 * 100) – (80, 000 + 22,00,000).

4,50,00,000 – 1,02,00,000 INR

First Order = INR 3,48,00,000

Second order profitability

Second order = INR (8,000*50) – (95,00,000 + 45,00,000)

The second order is INR 4,000,00,000 to 1,40,00,000

First, Tata Motors will take the biggest order, then it will take the third order, and finally, it will take the second-order in order of profitability in terms of cost of goods sold

Hospital. Tata Motors has not executed other orders and might not execute them) so the opportunity costs after the first order are INR (2.9 + 2.6) Cr or INR 5.5 Cr. After the second order, the opportunity costs are INR 2.

Opportunity Cost Formula – Example #3

Larsen and Tubro Ltd has two jobs to do. Only one of them can be done. Choose which operation to perform based on the following data.

Revenue from Order One is INR 10,00,000, and Costs are INR 4,000.

This order will make INR 12,00,000 in revenue and cost INR 8,00,000.

Solution:

First-order profitability

INR 10,00,000 – 4,00,000

So the first order is INR 6,00,000

Second-order profitability

Second Order = INR 12,00,000-8,000,00,00Firstnd Order = INR 4,00,000

The opportunity cost of not taking the second-order is INR 400000, so L&T will take order one.

the formula for the opportunity cost

Explanation of Opportunity Cost Formula

By using the best and second-best options, the formula calculates the best and second-best possible solution to the problem.

Relevance and Uses of Opportunity Cost Formula

Assessing relative prices of commodities

It’s a way to measure how valuable different communities are. Comparing different communities shows how valuable each community is.

According to the theory of economics, we know that goods are scarce, but human wants are limitless. So a particular commodity will only be used for one purpose. the best possible end product has to decide by authority while decided by authority on how to serve human wants better.

Deciding the Salary or remuneration of professionals

The opportunity cost could be used to benchmark a salary for a particular job. You can use opportunity cost as a benchmark for remuneration when someone (the suspect) gets another job.

Allocation of resources

Appropriate allocation of scarce resources

There aren’t enough resources. In order to make the most of resources, one must figure out how to use them for the greatest good of the end-user. You’ve got to pick products that will make your customers happy.

For instance, if the wood used to make one table could also be used to make three chairs, then that would be the best possible outcome. Everyone would benefit.

Opportunity Cost Formula Calculator

You can use the following Opportunity Cost Calculator

Opportunity Cost Formula in Excel (With Excel Template)

We’ll do the Opportunity Cost Formula in Excel. It’s really easy. Using the template, you can easily calculate First Order Profitability.

Calculate the profit from the second-order using the opportunity cost formula

Recommended Articles:

This formula has been a guide to calculating Opportunity Costs. Here we discuss how to calculate Opportunity costs plus practical examples.

We also provide an Opportunity Cost Calculator with a downloadable excel template.

conomics is often viewed as one of the difficult topics that people are reluctant to study despite its importance and relevance to our daily life. It is for this reason that Theboomoney.com Blog has committed itself to making the study of economics relevant to people’s lives in a simple and easy-to-understand style.