Problem:
Drop a Product/Opportunity Cost
Midwestsern Sod Company produces two products: Fescue Grass and Bermuda Grass
Bermuda Grass Fescue Grass
Selling price per square yard $1.90 $2.65
Less variable cost per square yard .40 1.00
(water, fertilizer, maintenance)
The company has 100,000 square yards of growing space available. In the past year, the company dedicated 50,000 square yards to Fescue and 50,000 square yards to Bermuda grass. Annual fixed costs are $120,000, which the company allocates to products base on relative growing space.
Martha Lopez, the chief financial officer of Midwestern Sod, has suggested that in the coming year, all 100,000 square yards should be devoted to Bermuda grass. The president vetoed her suggestion saying "I know that right now home construction is booming in our area, and we can sell all the grass we can produce, irrespective of what type. But, you know a lost of developers really like the Fescue grass and I'd hate to disappoint them by not offering it."
What is the opportunity cost of the president's decision to stick with both types of grass?