Relevant Costs Canadian Communications Company must decide whether to make some

Question

Relevant Costs Canadian Communications Company must decide whether to make some of its components or buy them from Xenia Corporation. The cost of producing 50,000 electrical connectors is $10.000 broken down as follows: Instead of making the electrical connectors at an average cost per unit of $2.20, the company has an opportunity to buy the connectors at $2.15 per unit. If it purchases the connectors, it will eliminate all the variable costs and one half of the fixed costs. Required: Prepare an analysis showing whether the company should make or buy the connectors. Will your answer Be different if the space that becomes available will generate an additional income of $25,000?

Explanation / Answer

Cost eliminated would be 60+30 +12 +.5* 8= 106K. It will cost 50,000* 2.15= 107.5K. So since it costs more than the company will save it's not a good deal. With an additional $25K income some costs would be offset and the net cost would be 107.5K- 25K= 82.5K. Since this is less than the company would save it now makes sense to do it, so, yes, the answer would be different.

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