Question
A company is considering buying a component part that they currently make using some existing equipment. Relevant costs to this sourcing decision include Blank______.
Multiple select question.
allocated general overhead
equipment depreciation charges
outside purchase price
variable overhead
Multiple select question.
allocated general overhead
equipment depreciation charges
outside purchase price
variable overhead
Answers
GPT-4o mini
When considering whether to buy a component part instead of making it in-house, relevant costs to the decision typically include costs that will directly impact the decision-making process. Here’s an analysis of the provided options:
1. **Allocated general overhead:** This is generally not considered a relevant cost because it is a fixed cost that would occur regardless of the decision and is therefore not incremental.
2. **Equipment depreciation charges:** Similar to allocated general overhead, depreciation is usually fixed and would not change directly with the decision to buy instead of making the product. Hence, it is not a relevant cost.
3. **Outside purchase price:** This is a relevant cost as it represents the direct cost the company would incur if they decide to buy the component instead of making it in-house.
4. **Variable overhead:** This is a relevant cost if it varies with production levels. If there are variable overhead costs incurred when producing the component, these would be considered relevant in the decision-making process.
Therefore, the relevant costs to this sourcing decision include:
- **Outside purchase price**
- **Variable overhead**
1. **Allocated general overhead:** This is generally not considered a relevant cost because it is a fixed cost that would occur regardless of the decision and is therefore not incremental.
2. **Equipment depreciation charges:** Similar to allocated general overhead, depreciation is usually fixed and would not change directly with the decision to buy instead of making the product. Hence, it is not a relevant cost.
3. **Outside purchase price:** This is a relevant cost as it represents the direct cost the company would incur if they decide to buy the component instead of making it in-house.
4. **Variable overhead:** This is a relevant cost if it varies with production levels. If there are variable overhead costs incurred when producing the component, these would be considered relevant in the decision-making process.
Therefore, the relevant costs to this sourcing decision include:
- **Outside purchase price**
- **Variable overhead**