Relevant Costs Canadian Communications Company must decide whether to make some
ID: 2347639 • Letter: R
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.