ACCA PM · Chapter 8 · Question 6 of 10
A company makes 10,000 units per year of a component at a variable cost of $18 per unit. Specific fixed costs of $40,000 per year would be avoided if the component were bought in, and general fixed overheads of $30,000 are currently absorbed into the component's cost. An outside supplier offers the component at $21 per unit. What should the company do?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Buy the component, saving $10,000 per year
Explanation
Relevant cost of making = (10,000 x $18) + $40,000 avoidable fixed costs = $220,000. Cost of buying = 10,000 x $21 = $210,000. Buying saves $10,000 per year. The $30,000 of general overheads is unavoidable and therefore irrelevant.
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