Distinction between relevance and cost behavior
Stanley Company makes and sells a single product. Stanley incurred the following costs in its most recent fiscal year.
Cost Items Appearing on the Income Statement | |
Materials cost ($10 per unit) | Sales commissions (2% of sales) |
Company president’s salary | Salaries of administrative personnel |
Depreciation on manufacturing equipment | Shipping and handling ($0.50 per unit) |
Customer billing costs (1% of sales) | Depreciation on office furniture |
Rental cost of manufacturing facility | Manufacturing supplies ($0.25 per unit) |
Advertising costs ($200,000 per year) | Production supervisor’s salary |
Labor cost ($8 per unit) |
|
Stanley could purchase the products that it currently makes. If it purchased the items, the company would continue to sell them using its own logo, advertising program, and sales staff.
Required
Identify each cost as relevant or irrelevant to the outsourcing decision and indicate whether the cost is fixed or variable relative to the number of products manufactured and sold.
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