Sherman Manufacturing Company currently manufactures a component used in one of its products. The annual production costs for 10,000 components are as follows:
An outside company has offered to supply 10,000 units of the component for $12.50 each. If the company outsources the component, it will be able to rent out the idled factory space for $1,000 per month but will not terminate the product manager.Required:1) Which items are not relevant to this outsourcing decision?2) Identify any opportunity costs associated with this decision.3) Prepare a quantitative analysis that indicates whether the component should be outsourced.
What will be an ideal response?
1) Non-relevant items: product-level costs of $18,000 and allocated facility-level costs of $12,000.
2) The $1,000 monthly rental fee is an opportunity cost associated with this decision.
3) Relevant cost to produce:
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What will be an ideal response?
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