A company makes 10,000 components a year at a variable cost of £28 per unit. An outside supplier offers to supply them for £32 per unit. If the components are bought in, specific fixed costs of £15,000 a year would be saved. Other fixed costs would not change. What should the company do?

Correct answer: C) Continue to make the components, saving £25,000 a year

Explanation

Relevant cost of making = (10,000 x £28) + avoidable fixed costs £15,000 = £295,000. Cost of buying = 10,000 x £32 = £320,000. Making is cheaper by £25,000. Fixed costs that will not change are irrelevant. Non-financial factors such as quality and reliability of supply should also be considered.