Megastar Software recently developed new spreadsheet software, Ad-Soon, which it
ID: 2592466 • Letter: M
Question
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.
Instructions
1-Is the £4 million offer “relevant” financial information?Why? (6 marks)
2-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?
3-Briefly describe the extent to which the pound sterling amounts of the two opportunity costs described in part 2 are known to management at the time the decision is made to accept or reject Vision Company’s offer.
4-Might there be any other opportunity costs to consider at the time of the making this decision? If so, explain briefly.
5-Explain why opportunity costs represent a common source of error in making cost analyses
Explanation / Answer
1. Megastar has developed new software d-Soon, which it intends to market by mail through ads in computer magazines. Means it will earn income by selling it in the market. Decision of Introducing it into the market is still pending , and before that it got an offer to sale the software to Vision computer company for 4 million .
so the offer from Vision computer is relevant . the reason is Megastar has now two option i.e. first one is to introduce the product into market and second one is to sell it wholly to Vision computer.
3. Deciding Opportunity cost for option (a) is little judgemental and it requires Analysis of market demand and price at which it is to be sold.
Thus management should do study of demand and shall make life cycle cost chart for the software.
4. there could be also other opportunity cost such as selling the software to some other customer or finding better deals for the software , or selling the software as packaged software. The least opportunity cost will be cost of borrowing the funds to make the software.
2. See, as Megastar has two options, so one will become opportunity cost for another. Opportunity cost is the cost of not doing the Next best alternative.
(a) if Megastar accepts offer from Vision computer , then opportunity cost will be income it could have earned from Introducing the software into the market and earning through it's sale. if Megastar is selling the software to Vision computer it means Total income it could have earned by introducing the software into the market will be less than 4 million.
(b) If it does not accepts the offer , then opportunity cost will be cost of next best alternative i.e. 4 million
5. As opporunity cost requires judgments based on Possible facts and figures , it represent a common source of error in making cost analysis.