Reference no: EM13214945
1. What is a relevant cost? Identify the two types of relevant costs.
2. Why are sunk costs irrelevant in deciding whether to sell a product in its present condition or to make it into a new product through additional processing?
3. Gilberto Company currently manufactures one of its crucial pars at a cost of $4.45 per unit. This cost is based on a normal production rate of 65,000 units per year. Variable costs are $1.95 per unit, fixed costs related to making the part are $65,000 per year, and allocated fixed costs are $58,500 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.50 per unit guaranteed for a three year period. Should the company continue to manufacture the part, or should it buy the part from the outside supplier?
4. Harold manufacturing produces denim clothing. This year it produced 5,000 denim jackets at a manufacturing cost of $45 each. These jackets were damaged in the warehouse during storage. Management investigated the matter and identified three alternatives for these jackets.
(1) Jackets can be sold to a second hand clothing shop for $6 each.
(2) Jackets can be disassembled at a cost of $32,000 and sold to a recycler for $12 each.
(3) Jackets can be reworked and tuned into good jackets. However with the damage, management estimates it will be able to assemble the good parts of the 5,000 jackets in to only 3,000 jackets. The remaining pieces of fabric with be discarded. The cost of reworking the jackets will be $102,000, but the jackets can then be sold for their regular price of $45 each.
Which alternative should Harold choose and why?
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