L Ltd Can Subcontract Out One of Its Components at $18

question 58

Multiple Choice

L Ltd can subcontract out one of its components at $18 each. The business can produce the component internally for a total cost of $19 including the allocation of fixed costs at $5 per component. L Ltd has spare capacity. Should it make the component internally or contract it out?

• A)Make the component as the variable cost of $14 ($19-$5)for internal production is cheaper than the $18 cost of subcontracting.
• B)Subcontract as the total cost of subcontracting at $18 is cheaper than the cost of $19 for internal production.
• C)Subcontract as it will be easier.
• D)None of the above.

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Definitions:

Assets

Resources with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit.

Subsidiary Corporation

A corporation wholly owned by another corporation (the parent corporation).

Shares

Units of ownership interest in a corporation or financial asset that provide for an equal distribution in any profits, if any are declared, in the form of dividends.

Consolidation

The process of combining assets, liabilities, and other financial items of two or more entities into one.