US CMA Part 2 · Chapter 6 · Question 6 of 22
Using the Cromwell Engines data (relevant cost to make $20.80 per unit, purchase price $21, 10,000 units), assume that if the valves are bought, the freed production space can be rented out for $30,000 per year. What should Cromwell do?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Buy, because total relevant cost is $180,000 versus $208,000 to make
Explanation
Relevant cost to make = $20.80 x 10,000 = $208,000. Relevant cost to buy = ($21 x 10,000) - rental income forgone if making $30,000 = $210,000 - $30,000 = $180,000. Buying is cheaper by $28,000. Equivalently, the $30,000 rent is an opportunity cost of making.
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