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

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Definitions:

Sensations

The process of detecting physical stimuli from the environment and converting them into neural signals.

Neural Signals

The electrical and chemical signals transmitted by neurons to communicate with each other or with muscles.

Human Vision

The ability of the eyes and brain to process light stimuli into images, enabling sight.

Candle Flame

The visible, luminous part of a candle that produces light and heat from the combustion of the candle’s fuel.