What Is the Opportunity Cost Formula?
The opportunity cost formula is a simple solution to answer the age old question of whether a particular course of action is worth starting. Opportunity cost is the total sum of what a person or organization has after they compare that sum to what they sacrifice. Opportunity cost is all about the profit a person or organization associates with missed or lost opportunities.
Another way to think about opportunity cost is to see it as a part of a lost contribution margin. A lost contribution margin is revenue, another word for money, minus variable cost. Variable costs come into play as a person or organization has to choose one course of action over another when providing a service or product. People and organizations use the opportunity cost formula to figure out if they have an absolute or comparative advantage over their competition.
The opportunity cost formula is a tool for staying competitive in a market that is not mutually exclusive. It is a useful formula for managing profit loss and figuring out if a course of action sustainable or not. The opportunity cost formula is an important tool for a crucial understanding of benefits and gains from alternative use of resources.