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:

Electronically Linked

Connected or networked through electronic means, enabling communication or data transfer across devices or systems.

Differential Stress

A condition with unequal stresses from different directions.

Compression

The type of differential stress that occurs when forces push in on a rock.

Shear

The type of differential stress that occurs when stresses on the edge of a mass are applied in opposite directions.