Answer to Question #172661 in Economics for Ibrahim Blizt

Question

Q1. Define cost center

1b. State five factors influencing cost center in business

Q2. Opportunity Cost and sunk cost are among the concept of cost. Require:

I. define the terms

Ii. subject for each of them situation in which the concept they might be applied

Iii. Access briefly the significance of each of the concept.

Answer 1

Q1. A cost center is a department or function within an organization that does not directly add to profit but still costs the organization money to operate. 

1b. The firm may cut corners on quality as much as possible and avoid considering innovations that would incur higher initial costs but ultimately result in a better product for the long run. Unless the top-level management is aware of these issues and sets quality requirements properly, opportunities may be missed.

Another problem with cost centers, particularly in the nonprofit and public sectors, is that the compensation and prestige afforded to division managers may be related to the size of division operations.

Q2. Opportunity Cost and sunk cost are among the concept of cost.

I. Sunk costs are named so because they can't be recovered.

Opportunity costs on the other hand are costs which do not necessarily involve any cash outflows but which need to be considered because they reflect the foregone profit that could have been elsewhere.

Ii. An examples of sunk costs are: your rent, marketing campaign expenses or money spent on new equipment, all of them can be considered sunk costs.

The example of opportunity cost is:

if you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else.

Iii. Each concept is significant for use in business to plan its costs, revenues, profits and any development strategies.