A manager invests $20,000 in equipment that would help the company reduce it’s per unit costs from $15 to $12. He expects the equipment to be in use for the next seven years. After two years, he realizes that if he outsourced the production, the unit cost would be $7 instead. At this point what should the senior manager do? a. Charge the manager for the next five years of depreciation b. Write off the equipment as sunk cost and allow for outsourcing since it is cheaper c. Not allow for outsourcing since the equipment is good for another five years d. None of the abov

The given case can be understood by applying the concept of opportunity cost. In simple words, opportunity cost refers to the cost of loosing profits due to choosing one alternative over the other.

In the given case, the company have already bought the machine, thus, if they now choose to go for some other production method they will have to bear the loss of unusual of machine which will overcome the benefit from outsourcing.