Variable and Fixed Costs

Managing costs requires an understanding of opportunity costs and triggers that change costs. As stated earlier, opportunity costs usually are easy to assess. The opportunity cost of using $220 in supplies is $220. The opportu- nity cost of using an hour of legal time billed at $150 per hour is $150. Other cases demand more study. For example, the opportunity cost of a vacant wing of a hospital depends on its future use. If the wing will be reopened for acute care in response to a rising hospital census, the opportunity cost of the wing will depend on its value as an acute care unit. If the wing will be reopened because the hospital needs a skilled nursing unit, the opportunity cost of the wing will be determined by its value in that role.

Sunk costs should be ignored. A sunk cost is a cost you cannot change. A computer’s purchase price is a sunk cost, as is money spent to train employees to operate the computer. If your current needs do not require the use of a computer, you should not fret about its initial cost. The opportunity cost of the computer will depend on its value in some other use (including its resale value).

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