Information Megastar Software recently developed new spreadsheet software, Ad-So
ID: 2588371 • Letter: I
Question
Information
Megastar Software recently developed new spreadsheet software, Ad-Soon, which it intends to market by mail through ads in computer magazines. Just prior to introducing Ad-Soon, Megastar received an unexpected offer from Vision Computer Company to buy all rights to the software for £4 million cash.
Question
1-Describe Megastar’s opportunity cost if it
A- accepts Vision Company’s offer and
B-Turns down the offer and markets Ad-Soon itself
C-Would these opportunity costs be recorded in Megastar’s accounting records?
please answer question 1 point A,B,and C . in a paragraph by critical thinking .
Explanation / Answer
Opportunity cost is the benefit foregone of the next best alternative on the acceptance of the current offer. In the given case, both the alternatives to Megastar are mutually exclusive i.e both cannot happen at the same time. As a result Megastar's opportunity cost is benefit that could have been received if the offer accepted would have been rejected.
1. A. If Megastar accepts Vision's offer to sell all the rights of software for 4 Million pounds, then the opportunity cost to Megastar is the amount of revenue / profits could not be earned from the sale of ads in computer magazines. Such cost is calculated on the basis of total revenue for all the years that could have been generated by the company.
B. If Megastar turns down the offer of VIsion Company to sell the software and decides to market ad soon, then the opportunity cost to the company is 4 Million Pounds i.e. the amount which would have been received on the sale of such software.
C. Opportunity cost is neither earned by the company nor it is an expense which is incurred and as a result it is not required to be recorded in the accounting records of the company. Opportunity cost is calculated for the management for decision making purposes and therefore, any such cost is not a material item to be recorded in records. Moreover, no accounting principle or accounting standards provide the working for the same or require the companies to show such cost in the financial statements or in any other accounting records.