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Opportunity cost concept: The opportunity cost of the value of opportunity foregone is taken into consideration when alternatives are compared. Opportunity Cost is the value of the next best alternative. In other words, it is the opportunity cost lost by diversion of an input factor from one use to another. It is the measure of the benefit of opportunity foregone.
The opportunity cost is helpful to managers in evaluating the various alternatives available when multiple inputs can be employed for multiple uses. These inputs may nevertheless have a cost and this is measured by the sacrifice made by the alternative action in course of choosing another alternatives..
Examples of opportunity cost:
(a) The opportunity cost of using a machine to produce a particular product is the earnings foregone that would have been possible if the machine was used to produce other products.
(b) The opportunity cost of funds invested in a business is the interest that could have been earned by investing the funds in bank deposit.
(c) The opportunity cost of one’s time is the salary which he would have earned by his profession.
