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Please give advise on the following issue (question 1 current pilot paper).
It is assumed that relocating production from us to Gamala will have an opportunity cost of 20 us (contribution lost per unit ) X total production X (1 – tax rate).
But by ceasing production we will not incurred fixed costs in US. Should not the relevant cost of this decision be: (contribution lost – fixed costs not incurred)X 1-tax rate? Maybe I miss something but I do not understand why contribution is the same with profit… contribution should laso cover the fix costs …
Thank you!
The reason is that although they are ceasing production in the US, they will be continuing to use the manufacturing facilities in the US to make other products (first paragraph).
So although they will be losing the contribution from this product, it has been assumed that any fixed costs of the factory in the US will still remain.Thank you very much! You do a great job for us, especially at this exam which I find to full of assumptions.
Maybe my English it;s not so good but from the question I understood that the closure costs actually suggest shutting down that facility (followed by the sell of assets and redundancy costs).
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