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:

Perpetual Inventory System

An inventory management system where updates are made continuously as transactions occur, keeping a real-time track of inventory levels.

Freight Charges

Costs associated with the transportation of goods, typically paid by the shipper to the carrier.

Inventory Purchase

The acquisition of goods and materials that a company holds for the purpose of resale or production.

Perpetual Inventory System

An accounting method that records inventory purchases and sales in real-time, providing a constant update of inventory levels.