A Nike women\'s-only store in California offers women\'s running, training, and

Question

A Nike women's-only store in California offers women's running, training, and sportswear products and also contains an in-store fitness studio for group and personal fitness training sessions. The store consistently earns profits in excess of $455,000 per year and is located on prime real estate in the center of town. The store owner pays $18,000 per month in rent for the building. A real estate agent approached the owner and informed her that she could add $7,300 per month to her firm's profits by renting out the portion of her store that she uses as a fitness studio. While the prospect of acquiring this rental income was enticing, the owner believed the use of that space as a fitness studio was an important contributor to her store's profits. What is the opportunity cost of continuing to operate the fitness studio within the store?

Explanation / Answer

Opportunity cost of an activity is the next best alternative's amount. In this case the store is adding value to the firm. But the owner is offered amount of money which is 7300 per month as the amount of the next best alternative. In this sense the opportunity cost of continuing to operate fitness Studio with in the store is $7,300.

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