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 $468,000 per year and is located on prime real estate in the center of town. The store owner pays $12,000 per month in rent for the building. A real estate agent approached the owner and informed her that she could add $6,000 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?

Question

Charity Morales

Business

8 May, 22:31

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 $468,000 per year and is located on prime real estate in the center of town. The store owner pays $12,000 per month in rent for the building. A real estate agent approached the owner and informed her that she could add $6,000 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?

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Answers (1)

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Nia Cunningham · Answer 1

The opportunity Cost is $72,000

but reviewing the impact the studio has on the store sales will give better deep dive in concluding this decision.

Explanation:

Opportunity cost is income foregone at the expense of a decision taken

In this case, it easy to see the foregone decision is "not renting" out the space used for the fitness studio

The income this would have generated is $6,000 x 12 months = $72,000

However, the question doesn't provide for us how much of an influence the fitness studio has on the sports store. In other words, if the % of the Studio users contribute a significant amount in Sales from the store, then closing down the studio would not make the $468,000 profit realizable in the coming years.