Action Products Is Deciding Whether to Outsource Production of a Certain

question 107

Multiple Choice

Action Products is deciding whether to outsource production of a certain component that is included in all of its products. It currently costs Action Products $0.95 to make each component in-house. If Action Products outsources, it can buy the component ready-made for $0.80 each. If Action Products outsources, it could shut down the production facilities it is currently using to manufacture the component, and save $10,000 a year in fixed costs. After analyzing both options, Action Products decided to continue making the component in-house. In the analysis done, which of the following items would be considered an opportunity cost?

• A) The difference between $0.95 and $0.80 per component
• B) The savings of $10,000 per year in fixed costs
• C) The difference between the fixed and variable costs to make the component in-house
• D) The contract cost of $0.80 to buy from outside source

Understand the cost flow in a manufacturing company, including the concepts of direct materials, direct labor, and manufacturing overhead.

Calculate the total manufacturing costs incurred during a period.

Calculate the cost of goods manufactured based on given inventory and cost data.

Interpret the role of beginning and ending inventories in the calculation of cost of goods sold and cost of goods manufactured.

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Definitions:

Economic Value

The worth of a good or service determined by the benefit provided to the consumer, often reflected in its price in the marketplace.

Social Value

The significance of actions or business activities in contributing positively to societal well-being.

Environmental Value

The importance placed on the conservation and improvement of the environment, reflecting the belief in the intrinsic worth of nature.

Finding Approach

A systematic method used to discover or identify a specific solution, technique, or strategy.