Opportunity cost problem
Opportunity cost is defined as the profit sacrificed by opting for an alternative option. Though most organizations work towards maximizing their profits, sometimes, opportunity costs are experienced (Froeb, McCann & Ward, 2018).
An example of opportunity cost can be seen through the organization’s decisions as described. The company in the year 2019 made huge profits as a result of massive sales. The vast sales resulted from the new technology that the company adopted that utilized business intelligence tools to learn what customers want and how they want them. This allowed the company to reduce wastage, increase customer satisfaction, grow customer base and increase profitability. The company in the annual general meeting with stakeholders resolved not to increase the dividends for stakeholders. However, the profits from the previous year’s sales would be directed towards investment in stocks. After the resolution, the managers were left to find a suitable stock to invest in. The managing director was also advised to invest in a portfolio to ensure more profitability and reduced risks of losing the profits from the lower stock value of a single company. However, the manager was faced with the challenge of choosing the best stocks to invest in that will ensure shareholders profit maximization. Upon analyzing the stocks between the airline industry and the delivery industry, the manager decided to invest in the airline industry due to the high profits and the increased travel across the globe. The manager anticipated massive profitability at the end of the next financial year, which is 2019/2020. Although the manager diversified the investment in various companies, the stocks mainly dominated the airline industry. In this regard, the manager though conscious during the investment to ensure high profitability, investment in different industries should have been considered. This would have helped reduce the opportunity cost. This is because the emergency of COVID-19 Pandemic has resulted in the airline industry’s fall, with many industries going down in terms of shares. However, other industries, such as the delivery industry, have gone high since most people are now using home delivery. An investment in this area could have safeguarded the company funds and ensure profitability despite the fall in shares in another industry.
The company decided with the main focus on the current information. The manager focusing on the data at hand, and the prospects believed the investment would yield more profits. The company could have invested in different industries to ensure a fall in one industry does not significantly affect the firm’s income.
The fund’s investment in the airline industry totaled $890,000. The amount was divided into three and invested in different company stocks. The amount from every company gave $50,000 as profit yearly in the airline industry. The same investment in the delivery industry would give approximately $ 20,000. However, since the airline industry has stalled, there are no profits, and the company’s opportunity cost is $20,000.
Reference
Froeb, L. M., McCann, B. T., & Ward, M. R. (2018). Managerial economics. Cengage learning.