Question

Each year Wright's Widgets buys 10,000 subcomponents that it needs in the production of its widgets from an outside supplier for $15 each. If Wright instead used its existing idle capacity to produce it in-house, the variable production costs would be $8 per unit and $3 of fixed production overhead would be allocated to each unit. Additionally, Wright would need to hire one quality control technician for $28,000 per year. The excess capacity that would be required is currently leased to another company for $25,000 per year. What is the advantage or disadvantage if Wright continues to buy the subcomponent from the outside supplier? A. $3,000 disadvantage B. $13,000 advantage C. $37,000 advantage D. $17,000 disadvantage QUESTION 4 Lea Corporation produces and sells bookends. Its managers are considering whether to outsource the task of cutting the wood for the bookends to Geneva Corporation. Which of the following is most likely to be a qualitative factor that managers will consider in making the decision? A. Amortization on DLN's fleet of delivery trucks B. Corporate fixed overhead allocated to the cutting machine C. Cost of delivery D. Timeliness of delivery

Answer 1

Advantage of buying = Cost of making + Profit lost – Cost of buying

= 8*10,000+28000+25000 – 15*10,000

= -$17000

Hence, the answer is D. $17000 disadvantage

Allocated fixed costs are not relevant since will be same under both the cases

4.The answer is D.timeliness of delivery

Allocated overheads are irrelevant

Amortization is a sunk cost