Question
Opportunity Costs Crown Tech Inc. manufactures hard drives for computer manufacturers. At the beginning of this year Crown began shipping a much-improved hard drive, Model
Opportunity Costs Crown Tech Inc. manufactures hard drives for computer manufacturers. At the beginning of this year Crown began shipping a much-improved hard drive, Model P729. The P729 was an immediate success and accounted for $5 million in revenues for Crown this year. While the P729 was in the development stage, Crown planned to price it at $180. In preliminary discussions with customers about the P729 design, no resistance was detected to suggestions that the price might be $180. The $180 price was considerably higher than the estimated variable cost of $90 per unit to produce the P729, and it would provide Crown with ample profits. Shortly before setting the price of the P729, Crown discovered that a competitor had a product very similar to the P729 and was no more than 60 days behind Crowns own schedule. No information could be obtained on the competitor's planned price, although it had a reputation for aggressive pricing. Worried about the competitor, and unsure of the market size, Crown lowered the price of the P729 to $150. It maintained the price although, to Crowns surprise, the competitor announced a price of $180 for its product. After reviewing the current year's sales of the P729, Crowns management concluded that unit sales would have been the same if the product had been marketed at the original price of $180 each. Having supported the higher price from the beginning, Betty Murphy, Crown's marketing director, believes that the opportunity cost of selling the P729 for $150 should be reflected in the company's internal records and reports. In support of her recommendation, Murphy explained that the company has booked these types of costs on other occasions when purchase discounts not taken for early payment have been recorded. Write a memo to management rebutting Murphys assumption by defining opportunity cost and explaining why opportunity costs are not usually recorded. Include the calculation for the opportunity cost for the current year.
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