Opportunity Cost Calculation
Posted: Mon Jan 20, 2025 8:54 am
To calculate opportunity cost, compare the costs of each option and calculate the difference. If one option costs more, think about how you could use that extra money or whether the benefits justify the expense.
The formula for calculating opportunity cost is:
Opportunity cost = Benefit of the alternative - Benefit of the chosen option
Suppose a company with a marketing budget of $100,000 is considering two options:
Digital advertising: Costs $100,000, expected profit $200,000
Content Marketing: Cost $80,000, expected profit $170,000
If the company chooses content marketing, the opportunity cost is the accounting profit lost from digital advertising, which is $30,000.
The formula applies similarly to time management. If you spend two hours on partners email lists admin tasks instead of sales team calls, your opportunity cost is the potential revenue lost from those calls.
Understanding and applying this formula allows you to make more informed decisions and ruthlessly prioritize resources, maximizing time and economic benefits.
Pro Tip: Don't overlook implicit costs when evaluating decisions. These hidden costs can significantly impact your overall cost analysis. Always keep them in mind to better understand what a choice really entails.
Everyday scenarios: Opportunity cost in action
Opportunity cost is not only a concept reserved for business decisions or economic models, but is part of everyday life and influences our decisions and the results derived from them.
Here are some practical and close examples of opportunity cost
The formula for calculating opportunity cost is:
Opportunity cost = Benefit of the alternative - Benefit of the chosen option
Suppose a company with a marketing budget of $100,000 is considering two options:
Digital advertising: Costs $100,000, expected profit $200,000
Content Marketing: Cost $80,000, expected profit $170,000
If the company chooses content marketing, the opportunity cost is the accounting profit lost from digital advertising, which is $30,000.
The formula applies similarly to time management. If you spend two hours on partners email lists admin tasks instead of sales team calls, your opportunity cost is the potential revenue lost from those calls.
Understanding and applying this formula allows you to make more informed decisions and ruthlessly prioritize resources, maximizing time and economic benefits.
Pro Tip: Don't overlook implicit costs when evaluating decisions. These hidden costs can significantly impact your overall cost analysis. Always keep them in mind to better understand what a choice really entails.
Everyday scenarios: Opportunity cost in action
Opportunity cost is not only a concept reserved for business decisions or economic models, but is part of everyday life and influences our decisions and the results derived from them.
Here are some practical and close examples of opportunity cost