Motor Home or Winter Vacation: Opportunity Cost
- Posted by Ted Hull
- On August 15, 2017
- At What Worth, Ends, Opportunity Costs
When a board develops its ends as it implements the Policy Governance® model, it considers three components. These components include: (1) how will people be better off, (2) which people will be better off and (3) what is it worth to produce these results. One of the challenges that the boards of not-for profits face in establishing ends is articulating what it is worth or what is often referred to as at what cost. It’s not just a matter of figuring out how much it will cost, but rather how valuable is it to the owners of the organizations to produce those results.
Let me bring it a little closer to home. You are contemplating buying a motorhome. It would allow your family to travel in comfort. Everything you need would be in the vehicle. Money would be saved by not buying restaurant meals and paying hotel bills, assuming you can find one when you want. There is no doubt your family would be better off with the motorhome. And now that you’ve done the research, you know that you can afford the model you have been looking at as well as the cost of operating it.
The question is how much better off will your family be in relation to the cost of the vehicle. One of the things you will need to consider is what you won’t do or have as a result of purchasing the motorhome. This is called the opportunity cost. As a result of the advantages to your family of having a motorhome, what will you be giving up? One of the costs which needs to be considered is what you won’t have because you have a motorhome. Because you have sunk your resources into a motorhome, you won’t be able to afford to rent a cabin at a fishing lodge in Canada or fly to a southern destination for ten days in the dead of winter. The cost of the motorhome includes the opportunity costs of other opportunities and amenities you must forgo.
Your board has pencilled in the intended results are for the intended demographic. It is confident that the revenue will be there to see the results accomplished. But in seeing those results accomplished, what other results won’t be achieved? A school might decide that it wants students to be academically prepared for admission into undergraduate science programs. It can afford the high end science labs which will be part of preparing its students. However in doing so, it can’t afford a second full size gym or a state-of-the-art music program.
To determine the at what cost component of the ends, includes careful consideration of values based on what your moral owners have communicated. Value is the result of looking at what the results are worth and what they will cost, including the cost of other results forgone.