What is opportunity cost?
Opportunity cost is a measure of value or benefit an individual misses out on when choosing between a set of options, usually in business of investing. This can be displayed as a simple equation.
Opportunity Cost ($) = Return of best option ($) – return of option chosen ($)
You can apply this simple equation to any set of business goals or investments. Lets take a look at an example of one use of this. Lets say you are choosing between giving business to two potential customers, but you can only handle the work load for one. The first customer is going to provide you with better business initially, but they have little room to grow. The second customer is going to give you little business to start but could grow exponentially. Lets say you chose option 1. After a year with this customer you earn $100,000.00. Then you find out, that the second option did yearly business of $150,000.00. Your opportunity cost would then be:
$150,000.00 – $100,000.00 = $50,000.00
In this example, because of your choice, you lost out on $50,000.00 in business in that year. You can now use this to alter how you make decisions in the future. Next time you may chose the opportunity with higher upside but lower initial benefit.
Opportunity Cost Calculator
Enter the return of best alternate option and the return of your chosen option to calculate both opportunity cost and percent of possible business lost.
If you explore this calculator a little more, it’s likely to open your eyes into many aspects of your business choices that effected your bottom line.
Check out our finance calculators for more information on understanding your business.