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- December 23, 2019 at 7:47 am
In make or buy decision which 4 of the following are to included in considerations
1) Amount of reallocated rent cost caused by using production space differently
2) VC of purchase from new supplier
3) Amount of bribe from potential new supplier
4) Level of discount available from new supplier
5) Redundancy payments to supervisor of product in question
6) Material no longer bought to manufacture the product
7) Saved labour cost of production staff redirected to other work
Sir correct ans are 2,4,5 and 6. Can you please explain me that why are 2,4,5,6 are correct and why 1,3 and 7 are wrong?December 23, 2019 at 2:06 pm
We are only concerned with items that affect the total cost payable by the company.
1 Reallocating rent does not affect the total rent being paid by the company.
3 It is illegal to take bribes and this is a professional exam – the company will not accept bribes,
7 The staff are being redirected to other work and so the total labour cost to the company will not change.
The other items will all involve a change in the total costs.January 7, 2020 at 10:36 am
Are 2,4,5 and 6 all variable cost?January 7, 2020 at 3:43 pm
No they are not, but as I wrote in my previous reply they will all involve a change in the total costs!
Whether they are variable or not is of no relevance – all that matters is whether or not the total cost to the company changes.
2 is obviously a variable cost because it says so
4 is obviously a variable cost because the discount will vary with the amount bought
5 is not a variable cost but will only be incurred if they decide to buy rather than make the product
6 is obviously a variable cost because the material cost varies with the amount not produced
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