Midwestern Sod Company produces two products: fescue grass and Bermuda grass. Fe
ID: 2713609 • Letter: M
Question
Midwestern Sod Company produces two products: fescue grass and Bermuda grass.
Fescue Grass Bermuda grass
Selling price per square yard $3.00 $3.85
Less variable cost per square yard
(Water, fertilizer, maintenance) $0.83 $1.55
The company has 130,000 square yards of growing space available. In the past year, the company dedicated 65,000 square yards to fescue and 65,000 square yards to Bermuda grass. Annual fixed cost are $130,000, which the company allocates to products on relatively growing space/ Martha Lopez, the chief financial officer of Midwestern Sod, has suggested that in the coming year, all 130,000 square yards should be devoted to Bermuda grass. The president vetoed her suggestion, saying, "I know that right now home construction is booming in our area, and we can sell all the grass we can produce, irrespective of what type. But, you know a lot of developers really like that fescue grass and I'd hate to disappoint them by not offering it."
Required
What is the opportunity cost of the president's decision to stick with both types of grass?
Explanation / Answer
Existing situation Particulars Fescue Grass Bermuda Grass Square yards assigned 65000 65000 Selling Price per yard 3.00 3.85 Less: Variable cost per yard 0.83 1.55 Contribution per yard 2.17 2.30 Total Contribution (total yards assigned*contribution per yard) 141050 149500 Hence, if the total area is assigned to Fescue Grass, the opportunity cost= 149500, i.e. the contribution lost on Bermuda grass.