The Management of Villanueva Industries Has Been Evaluating Whether the Company

question 20

Essay

The management of Villanueva Industries has been evaluating whether the company should continue manufacturing a component or buy it from an outside supplier. A $100 cost per component was determined as follows:
Villanueva Industries uses 4,000 components per year. After Splendor, Inc., submitted a bid of $80 per component, some members of management felt they could reduce costs by buying from outside and discontinuing production of the component. If the component is obtained from Splendor, Inc., Villanueva's unused production facilities could be leased to another company for $50,000 per year.
Required:

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Definitions:

Average Variable Costs

The total variable costs of production divided by the quantity of output produced.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and insurance.

Average Variable Cost

The total variable cost per unit of output, obtained by dividing total variable costs by the quantity of output.

Output

The total amount of goods or services produced by a company or country.