Shri Chanakya Education Society’s

Indira Institute of Management PGDM, Pune

End Term Examination Presentation & Viva Voce (Jan 2022)

Subject : GC 10101 : Managerial Accounting for Business Decisions

Topic: Explain Decision wise –Opportunity Cost and Sunk Cost

with suitable example

Group No. B 18
1) 21-23IIMPGDM186 Fahad Dhanse 3) 21-23IIMPGDM188 Vaibhav Salve
2) 21-23IIMPPGDM187 Dipak Golte 4) 21-23IIMPPGDM189 Sushil Khelkar

Batch: 2021-23
 Group No. B 18

Opportunity Cost
Opportunity cost represent the potential benefits an individual , Investor,or business misses out on when
choosing one alternative over another. Because opportunity costs are unseen, they can be easily overlooked.
 The basic equation form, opportunity cost can be defined as:

Opportunity Cost =(returns on best forgone option)-(returns on chosen option)

Opportunity Cost is the forgone benefit that would have been derived from an option not chosen
To properly evaluate opportunity costs, the costs and benefits of every option available must be considered
and weighed against the others.
Directly or indirectly, opportunity cost underpins the majority of day-to-day economic decisions that are
made in society
 Group No. B18

 As a representation of the relationship between scarcity and choice the objective of

opportunity cost is to ensure efficient use of scarce resources .
 It incorporates all associated costs of a decision, both explicit and implicit
 Opportunity cost also includes the includes the utility or economic benefit an
individual lost , if it is indeed more than the monetary payment or actions taken. As an
example , to go for a walk may not have any financial costs imbedded into it Yet the
opportunity forgone is the time spent walking which could have been used instead for
the purposes such as earning an income
 Sacrifice is given measurement in opportunity cost which the decision maker forgoes
the opportunity of the next best alternative.
 Group No. B18

What Opportunity Cost Explains

 Opportunity cost analysis plays a crucial role in determining a
business’s capital structure. A firm incurs an expense in issuing
both debt and equity capital compensate lenders and shareholders
for the risk of investment, yet each also carries an opportunity
cost.
 Funds used to make payments on loans can not be invested in
stocks or bonds, which offer the potential for investment income.
 OPPORTUNITY COST

Money

Invest @5% Car

Opportunity cost
= price of car
 Group No. 10

Example
 Suppose person A is Salaried Employee with salary of Rs.6,00,000
p.a. who wants to do MBA
 To pursue MBA he needs to quit his job which also means to
sacrifice salary for next 2 years.
 Fees of college is supposedly Rs. 5,00,000 and living expenses are
1,00,000 so here, he is sacrificing total of Rs.12,00,000
 Here Rs.12,00,000 is opportunity cost for person A.
SUNK COST

 Sunk costs are costs that have been incurred already and cannot be
recovered.
 As sunk costs have already incurred, they remain unchanged and should not
influence present or future actions or decisions regarding benefits and costs.
 Sunk cost are also referred as historical data.
SUNK COST

 From the traceability source of costs, sunk costs can be direct costs or
indirect costs.
 If the sunk cost can be summarized as a single component as a direct cost; if
it is caused by several products or departments, it is an indirect cost.
SUNK COST

 Analysing from the composition of costs, sunk costs can be either fixed costs
or variable costs. When a company abandons a certain component or stops
processing a certain product, the sunk cost usually includes fixed costs such
as rent for equipment and wages, but it also includes variable costs due to
changes in time or materials. Usually, fixed costs are more likely to constitute
sunk costs.
EXAMPLE

 As we seen in above example person A toom admission in MBA; he decided to shift

to another city for that
 But he has rented an apartment on yearly basis for Rs.1,20,000 of which 3 months are
remaining which are non refundable.
 So the amount Which he paid but not used of Rs. 30,000 is Sunk Cost for A.
Thank
You